This Crazy Trading Range
Click Here For Wyckoff Wave Chart 04-25-2014
The Wyckoff Wave’s most recent trading range, which began in February at point R, is a classic example of why the Wyckoff strategies and techniques are not mechanical tools.
While it is very easy, in hindsight, to go back and highlight springs, up thrusts, signs of strength and weakness and last points of supply or support, it can sometimes be difficult to identify them as they happen.
That is why the market action after a suspected spring or upthrust needs to confirm that event. In the case of the spring, good demand, on increased price spread and volume needs to come into the market. Conversely, supply in the form of increased price spread and volume needs to follow an upthrust.
That is why the Wyckoff student always needs to closely examine these events and develop different scenarios. What would happen if demand, or supply, does not come into the market after a spring or upthrust? The nimble Wyckoff student always is considering alternative scenarios and, especially if they are short-term or swing trading, has plans in place if things don’t go exactly as expected.
This blog post is going to examine the trading range from point Z through Friday’s market action.
On the rally to point Z the Wyckoff Wave appeared to move through the resistance at the top of the trading range (jump the creek). This would be the mechanical reaction to the move through the resistance. However, look at the volume. It decreased. This is where demand should have appeared, but instead there was a lack of demand.
This was confirmed by the negative divergence with the Optimism – Pessimism Index. While the Wyckoff Wave was moving into new high ground, the O – P Index was not. This confirmed the lack of demand.
In addition, the Technometer was in a nearly overbought condition and would have become clearly overbought if the rally had continued.
The Wyckoff Wave was vulnerable to supply coming in and at point Z it did just that.
At that point some may have thought the Wyckoff Wave experienced an upthrust. Instead, strong supply in the form of widespread and increased volume simply drove the Wyckoff Wave back into the trading range. This also created the top bank of the creek.
Throughout this trading range, the Wyckoff Wave has remained within its intermediate and long-term uptrend channels. Intermediate and long-term market indications continued to be bullish. Therefore, it was reasonable to begin to create a possible spring scenario as the Wyckoff Wave approached the bottom of the trading range.
At point C, the O – P Index has moved into a positive divergence with the Wyckoff Wave when compared with points Y, W, U and S. However, the Technometer, which had been oversold at point A, was now in a neutral condition.
If the Wyckoff Wave penetrated the trading range support, the Technometer could have moved into an oversold condition.
However, those of us waiting for a spring were disappointed. The Wyckoff Wave rallied back to the top of the trading and on Monday experienced what may have been an upthrust.
Monday’s market action met the upthrust criteria. The Wyckoff Wave attempted to move into new high ground. Volume increased. The price spread decreased and the Wyckoff Wave closed at its low for the day.
From a mechanical standpoint, point D was automatically an upthrust. However, since Wyckoff is in a mechanical study, the upthrust needed to be confirmed with continued supply. We would expect to see increased price spread and volume to the downside.
Instead, the next day, the Wyckoff Wave reacted on decreased price spread and slightly increased volume. This indicated the presence of some demand. However, a review of the intra-day waves suggested that both supply and demand were present and this was not a definitive moment.
On Thursday price spread increased, but volume was sustained and the picture was still unclear. On Friday, while volume increased, the price spread narrowed slightly. Again, this suggested some demand was present.
While the upthrust scenario cannot be eliminated, this is not how an index or stock normally responds to an upthrust. Therefore, alternative scenarios needed to be considered.
Once again, the O – P Index has moved into a positive divergence with the Wyckoff Wave. The relationship of point C is lower than the Wyckoff Wave, if the Wyckoff Wave itself remains near the top of the trading range.
The Technometer has moved into an oversold condition.
These are both changes in character as they are happening as the Wyckoff Wave is near the top, not the bottom of the trading range.
These suggest the Wyckoff Wave could rally into new high ground.
Is it possible that the move from points C to D could have been a Sign of Strength?
It is important to understand that a Sign of Strength can occur within a trading range and does not require that it be preceded by a spring and secondary test.
However, a Sign of Strength needs to be confirmed by a Last Point of Support. A Last Point of Support is confirmed when a stock or index reacts on reduced price spread and volume. It also needs to hold at or above the halfway point of the Sign of Strength.
So, was point D an Upthrust or the high point of the Sign of Strength? Unfortunately, the jury is still out. That is why both scenarios need to be established and followed using the following:
As the Wyckoff Wave is already approaching the halfway point of the rally, for the upthrust scenario to be sustained, the Wyckoff Wave must react back into the trading range on good price spread and volume. This would put it in a position to test the support line of the intermediate term up trend channel.
If the Wyckoff Wave rallies on Monday and the rally is of poor quality (reduced price spread and volume), the Wyckoff Wave could put in a successful test of the upthrust. This would give the Wave a second chance for strong supply to drive it back down towards the bottom of the trading range.
Last Point of Support
For this to be successful, the Wyckoff Wave should hold at or above the halfway point. It would be helpful if the Wave reacted on Monday on reduced price spread and volume.
Once the Last Point of Support is reached, the Wyckoff Wave should rally strongly, into new high ground on increased price spread and volume.
Factors supporting the Last Point of Support scenario also include the positive Technometer readings and divergences with the Optimism – Pessimism Index.
Each daily Pulse of the Market Report sent to subscribers includes a What To Do section.
On Tuesday, aggressive short-term bears had an opportunity to enter the market to the downside. While that opportunity is passed, those who took positions in the area of point D enjoy some profits. They should also have move stop orders to protect against a rally.
If the Last Point of Support scenario works out, there will be opportunities to the upside. Short-term bulls should watch Monday’s market action closely.
Many intermediate and long-term bulls have used the trading range to adjust and add to their portfolios. While most of this was done at or before point C, there are still some opportunities if the Last Point of Support scenario is confirmed.
Even if the upthrust scenario is confirmed, the relative strength of the market and the indications coming from the Wyckoff tools make it difficult to recommend intermediate or long term opportunities to the downside.
By creating the following quantitative scenarios, “wishing and hoping” is eliminated and Wyckoff students can act on facts, not dreams.