This past week the Wyckoff Wave did react, but the reaction was not particularly enthusiastic. At Friday’s close, the Wyckoff Wave was testing the low at point Y and a support point marked by the line drawn from point E. Point E was a rather important shakeout that took place in October, 2014. It is not included in this chart as I wanted to present an easy to read chart that contained market activities that began in August, 2015.
Thursday’s poor quality rally and the presence of supply on Friday, continues to suggest the Wyckoff Wave will continue to react. At the very least it is expected to move through the support line of the short-term uptrend channel (drawn in blue) and test the support line of the intermediate-term downtrend channel (drawn in red).
However, as there is in a 2 1/2 month battle between supply and demand, beginning at point V, the timing of this reaction is still unsettled.
Over the past few weeks, I have received several e-mails about the Wyckoff Wave’s activity since point V. I have also been asked about the term “sideways movement”, as opposed to a trading range.
In reviewing the Wyckoff Wave’s activity since the late August Selling Climax, I will try to address these questions.
On August 24, 2015, the Wyckoff Wave experienced a significant Selling Climax. There was an automatic rally to point R and a Secondary Test at point S. The Wyckoff Wave then began what appeared to be a logical trading range. Resistance was established at point T. Point U became a a supply point. It would’ve been quite logical for the trading range to roughly move within that range until it experienced some sort of ending action. That didn’t happen.
Instead, the rally off point U moved noticeably above point T to point V. This immediately suggested the Wyckoff trader go back and look at earlier market action. Was point U actually a Spring? It did react below the previous low at point S. However, demand did not come into the market for four trading days until there was a one-day up move on good price spread and volume. That is marked as point U-1 This strongly suggests point U was not a Spring and the subsequent rally was not a Sign of Strength. Instead, the Wyckoff Wave was still looking for a more consistent area of resistance.
This scenario is confirmed as the Wyckoff Wave rallied past point T. A horizontal resistance line is drawn, in black, from point T. Notice that as the Wyckoff Wave moved above point T, the first two days around reduced price spread and lower volume. If the Wave was going to “jump the creek” and put in a major Sign of Strength, we would’ve seen strong demand, shown by increased price spread and volume.
Finally, the rally to point V ended on wider price spread and decreased volume. This suggests a lack of supply. Again, this is not conducive to any form of a Sign of Strength. All this indicates that the Wyckoff Wave is still feeling out the resistance levels of the developing trading range that began with the August Selling Climax.
One of these scenarios I received was that the Wyckoff Wave was developing a new trading range that began at point V. While anything is possible, there is no definitive beginning of a trading range. Since the Wyckoff Wave was rallying, a definitive beginning would have been Preliminary Supply or a Buying Climax. It does not appear that either one of these took place. In fact, the only strong down day was point W. There, the Wyckoff Wave reacted on increased price spread and volume. However, there was no follow-through and the Wyckoff Wave continued a poor quality rally to point K.
The Wyckoff Wave reacted to point Y. The reaction was on relatively higher volume, but relatively narrow price spread. The rally suggests a battle between demand and supply, with a supply being a slight winner. However, supply was not strong enough to drive the Wyckoff Wave back into the initial trading range and test the lows at point U.
Instead, it put in another poor quality rally to point Z. As point Z, was in the same area as point X, it appears the Wyckoff Wave was establishing a resistance area within the trading range.
The reaction off point Z has taken a long time and made little progress. This continues to suggest the battle between demand and supply is not yet resolved. There is a good probability the resistance area has been established, but until demand is dried up, we will not see the defined bottom of the trading range.
This is why I have called the move from point V a sideways action. It is simply part of a developing trading range and has no unique characteristics unto itself.
I would suggest that what we are seeing is the result of an artificial stock market. The government controlled low interest rates make the stock market the only place one can receive a reasonable return. This appears to mean that buyers who were initially scared out of the market at the Selling Climax, are putting their feet back into the water in anticipation of a major up move. These buyers are “weak hands” and need to move out of the market before the trading range can develop. This is the purpose of an accumulation trading range. This one may take a bit longer.
As we are in uncharted waters, the timing on this is difficult to forecast. The secret is patience. Nothing is more frustrating than a market that doesn’t move. The Wyckoff trader needs to be disciplined and realize there will probably not be significant market movement for the rest of 2015.
However, the Wyckoff Wave will react and establish a trading range boundaries. This will provide for some short-term trading within the range and, when we see ending action, new intermediate and long term opportunities.