The Wyckoff Wave is at an important Support Area. Where Do We Go From Here?

Click Here For Wyckoff Wave Chart 08-30-2013

This week, the Wyckoff Wave has reacted and is testing a very important support area. This support area was first established back in April, as the Wyckoff Wave moved sideways from point B. The Wyckoff Wave then penetrated the resistance line drawn from point D (the Creek) and rallied to point J.

After moving sideways for several months, that resistance line has now become a support area. More importantly it is also testing the low at point Q.

At this point, the Wyckoff Wave has several options. It can spring the low at point Q. It can react sharply through the support (fall through the ice). Finally, it could simply test the lows at point Q and rally within the trading range.

Let’s review the week’s market action and the various options that need to be considered.

On the reaction from point W, the Wyckoff Wave moved into an oversold position relative to its short-term down trend channel. The downtrend channel is drawn in red on the daily chart.

As of Friday, August 23rd, the Wyckoff Wave was rallying off the low at point X. This rally was on relatively narrow price spread and decreasing volume. It was also approaching the support line of the short term down trend channel.

While the probability was low, the Wyckoff Wave needed a strong Monday rally to move back into the short term down trend channel and possibly provide the impetus to test the top of the range at point U. That didn’t happen.

On Monday, the Wyckoff Wave briefly rallied and tested the support line. Demand was withdrawn and the Wyckoff Wave reacted. More supply came in on Tuesday as a wave saw the widest price spread and highest volume of the week. It appeared as though the Wyckoff Wave was going to penetrate the low at point Q. There would either be a spring or a sharp reaction through the support. That also didn’t happen.

Instead, on Wednesday, the Wyckoff Wave experienced another intra-day failure to the downside. While volume was lower than the previous day, it was relatively high. This indicated that some demand had returned to the market right at the support area.

This gave the Wyckoff Wave another opportunity to rally off the support back into the trading range. However, there needed to be good follow through on Thursday with demand taking charge of the market. Like everything else this week, that didn’t happen either.

Instead, on Thursday the Wyckoff Wave was unable to continue the rally and experienced an intra-day failure to the upside. This would suggest a lack of demand. However, a review of the intra-day waves showed that demand was withdrawn in the late morning and some supply returned driving the Wave down to its poor close.

The supply continued on Friday, but analysis of the intra-day waves showed that it was not overwhelming. In fact, the first part of the trading day indicated a lack of supply. While supply did return, it was unable to drive the Wyckoff Wave down through the support.

Friday was a fairly important day. When a stock or an index penetrates a support area and moves into new low ground, it does so quickly and definitively. As is often said in Wyckoff circles “it needs to go and go now”. That also didn’t happen. Instead, it only reacted slightly and closed in the middle of a slightly wider price spread, on slightly increased volume.

So as the markets closed on the Friday before Labor Day, the Wyckoff Wave had missed two opportunities in the past three days to react sharply into new low ground.

Because the Wyckoff Wave is in a significant oversold position, relative to its short-term down trend channel, a second short-term trend line has been drawn. As is often the case when an index or stock moves into a significant oversold or overbought position, the reverse use of trend lines is the technique used to draw the new trend channel.

In a normal down trend, the supply line is drawn between the high that marked the beginning of the downtrend and the top of the next rally. In this case, supply line of the short-term downtrend was drawn through points U and W. A parallel support line is then drawn through the low. In this case it was point V.

When a down trend channel is drawn, using the reverse use of trend lines, the support line is drawn first. It is drawn through the first low and the next low. In this case the support line is drawn through points V and X. The parallel supply line is drawn through point W.
This is shown in light green on the daily chart.

The Wyckoff Wave is presently testing the support line of the new down trend channel.

There are other positive indicators in place. The Optimism – Pessimism Index continues in a positive divergence with the Wyckoff Wave when compared with point Q. The O – P Index is substantially lower than it was at point Q. Conversely, the Wyckoff Wave is slightly higher. This indicates the effort that is been made to drive the Wyckoff Wave lower is not being matched by the results.

The Technometer has moved back into an oversold condition. If the Wyckoff Wave was going to move through the support at point Q, the Technometer would probably not be oversold. However, this oversold condition is somewhat mitigated by the Force Index which is producing high negative numbers. It should be noted that the Force Index is also rallying and moving back toward its up trend channel. A continued rally would reduce any impact on the Technometer.

The relatively high volume we have seen this past week is not indicative of a drying up of supply. This would suggest that supply is still present. The presence of supply would greatly reduce or even eliminate the “test the bottom of the trading range and rally” scenario.

That leaves us with the spring scenario. The Wyckoff Wave almost sprung the support on Wednesday and is now only a few points above the low at point Q. Some supply was still present. While demand is not overpowering and sustained, it has shown some signs of life and may well appear if the Wyckoff Wave springs the trading range.

Will that happen? A lot of “that didn’t happen” has already appeared in this blog post and the Wyckoff Wave may surprise us one more time.

However, if the Wyckoff Wave penetrates the support and then strong demand comes into the market, this might be a good time to consider long positions.