The stock market, as represented by the Wyckoff Wave, is solidly in the next stage of the bull market that began at the end of 2009. The last few blog posts have covered the Wave’s intermediate and long-term trends and this past week has brought more of the same.
If we look at the intermediate up trend channel (support line drawn from points G – M, supply line drawn through L) we see a nice move to the upside. The Wyckoff Wave respected the trend channel at point N and then moved into an overbought position on the rally point R. The reaction to point U did not reach the support line, which is a positive indication.
The Wyckoff Wave became overbought again on the rally to point Z. The reaction to point A didn’t come close to reaching the support line and this week’s rally to point B again moved the Wyckoff Wave into an overbought position relative to its up trend channel.
Intermediate and long-term bullish investors who have taken positions at lower levels are comfortably counting their profits.
Long term investors are quite comfortable and not nearly as interested in the minor rallies and reactions as the short term trader.
Up until now, the Wyckoff Wave has rallied and moved sideways, rather than reacting. While this is fine with longer-term investors, it is difficult for short-term traders to identify entry points.
Short term traders cannot always wait for definitive Wyckoff signals like Springs and Upthrusts. They also try to identify turning points based on the relationships between price spread and volume. They also look for divergences with the Optimism – Pessimism Index and overbought or oversold conditions on the Technometer.
When looking at the relationship between price spread and volume it is helpful to remember the following guidelines.
1. When there is an up move and both price and volume increase from the previous day, there is a strong possibility demand is present.
2. Conversely, when a stock or index moves lower on increased price spread and volume, we can look for the presence of supply.
3. If a stock advances on reduced price spread and volume, we are probably seeing a lack of demand.
4. If the stock declines on reduced spread and volume, this suggests a lack of supply.
5. If a stock advances on reduced spread and increased volume, this is an indication that supply is present.
6. If a stock declines on reduced spread and increased volume, we are probably seeing demand come in to the stock.
7. If a stock advances on increased spread and reduced volume, this suggests a lack of supply.
8. If a stock declines on increased spread and reduced volume we are probably looking at a lack of demand.
These are good general rules, but not specific mechanical indicators. They should be included in part of the trader’s analytical process.
We may be seeing one of those turning points that would present a short term opportunity to the downside. Let’s look at this week’s rally to point B and see if there are some clues to suggest we could be seeing a short term reaction in the near future.
The first place to look is at the quality of the rally from point A. On Monday, the Wyckoff Wave rallied on reduced price spread and volume. This would suggest a lack of demand. Tuesday brought a slightly narrower price spread, but increased volume. Reduced spread and increased volume suggests the presence of supply.
This is where we should see good demand coming into the market, but instead it is being withdrawn and some supply was present.
The trend continued on Wednesday as the Wyckoff Wave continued to rally, but on reduced price spread and volume. Another lack of demand day.
Finally on Thursday, the Wyckoff Wave completed its five day rally on slightly reduced price spread and increased volume. This would normally suggest the presence of supply. However, a review of the intra-day chart of the Wyckoff Wave shows that after a nice morning rally, demand was once again withdrawn. While the Wyckoff Wave did react during the afternoon hours, the relationships between individual waves price spread and volume indicated good supply was not coming into the market.
As the Wyckoff Wave was advancing, it’s Technometer was moving into an extremely over bought condition. While this suggests a reaction is on the horizon, it is important to include the Force Index in an overall analysis.
When the Technometer is overbought, but the Force Index is producing positive or slightly negative numbers, this suggests the reaction will not be particularly long or deep.
A glance at the Force Index shows that while the Technometer was overbought, the Force Index was in positive territory.
The Optimism – Pessimism Index is in harmony with the Wyckoff Wave, eliminating any negative divergences.
While these are all positive indications of relative strength, the Wyckoff Wave has also moved from point A to point B in a rather weak manner. It is also in an overbought position relative to its up trend channel.
While there is the possibility of a short-term reaction, the Wave’s past behavior and the positive indications from the Wyckoff tools do not make this a sure thing. When that happens, we would look for a successful test of the highs, before considering a position to the downside.
On Friday, the Wyckoff Wave put in a rather interesting day, that is best seen on the attached intra-day chart. The points marked A and B on the intra-day chart are the same as point A and B on the daily vertical line chart.
From the low at point A, the Wyckoff Wave established an intra-day up trend channel and rallied all the way to point B, which was Thursday’s high.
On Friday, there was a fairly substantial gap opening to the downside. Any supply that was present quickly dried up and the Wyckoff Wave moved into an oversold position relative to its intra-day up trend channel at point G.
The Wyckoff Wave spent the rest of Friday attempting to rally. The rally was on relatively narrow price spread and volume. While the last wave of the trading day does show large volume, it lasted one hour and 25 min. and gained less than 100 points.
A quick look at Friday’s price spread and volume showed that the Wyckoff Wave traded lower on decreased spread and volume. According to the guidelines listed above, that should have been a lack of supply day and a positive indication the Wyckoff Wave would continue to rally.
However, a day’s market action is taken from the opening price to the closing price. Using that criteria, the Wyckoff Wave rallied on decreased price spread and volume. This indicates a lack of demand. The lack of demand indication is backed up by the poor performance shown in the intra-day waves.
This suggests the Wyckoff Wave may be testing the highs at point B. If, on Monday, the Wyckoff Wave is unable to rally past point B, we would have a successful test of the highs and aggressive very short term positions to the downside could be considered.
Finally, I would not take a position until the intra-day up trend channel is broken. That way I would not be trading against the trend.
While this is of little interest to the intermediate and long-term bulls, who are happily counting their profits, it is an excellent opportunity to share some short term Wyckoff principles.