Trading Ranges and Future Directions

Jim OBrien Week In Review 0 Comments

Click Here For Wyckoff Wave Chart 03-02-12

The first order of business this week is to wipe a little egg off my face. Patently, I was incorrect about the expected move to the upside. I was a bit too aggressive for my own good and simply got caught. Over the years, I have seen many significant moves begin with the subtle change I wrote about last week. Unfortunately, this wasn’t one of them.

The most important item in last week’s commentary was that the Wyckoff Wave did indeed experience a change in character. This changing character and the continuing, rather dull, sideways movement of the Wyckoff Wave now suggests that instead of the reaction that was initially expected we are seeing a period of re-accumulation.

Initially, when the Wyckoff Wave up thrusted the old resistance at point U, it appeared the Wave was prepared to react back towards support line H – P and the previous support/resistance line drawn from point K This didn’t happen and the sideways movement began.

This sideways movement formed a fairly tight trading range with the support line drawn through point V and a resistance line drawn through point W. Now the question became, were we looking at re–accumulation or some distribution.

I felt that the first important clue came at point Y when, for the first time, strong supply did not come in as the Wyckoff Wave reached the top of the trading range. Instead, there was a lack of supply. Then demand came in at point Z. The Wyckoff Wave experienced an intraday failure to the down side, rallied nicely throughout the day and closed near its high.

However, the Wyckoff Wave was unable to penetrate the resistance. The next day, marked at point A, saw demand dry up at just the wrong time. This was where I expected the Wyckoff Wave to drive through the resistance and continue its rally. This lack of demand was also a signal to short-term traders to either close their positions or watch their stops very closely in anticipation that the market would not move strongly to the upside.

Any short term long positions should’ve been closed on the day following point A as it was definitely apparent that the market was not going to make an immediate strong move up.

The Wyckoff Wave then continue to move sideways for the rest of the week. However, as you can see on the vertical line chart, with the exception of one day that is marked by the up arrow, supply did not come in and even on that day it was not sustained.

Even though the bottom of the range is marked by the lows at point X, for the last 10 trading days the Wyckoff Wave has stayed within a much smaller range. The price spread has been narrow and the relative volume has decreased. As mentioned above, this is almost always a sign of accumulation or re–accumulation.

Now that we have identified the trading range and made an assumption that it is accumulation, the next step is waiting for ending action.

It is most likely that the ending action will be in one of two forms.
1. It can be a spring. The Wyckoff Wave can spring the entire trading range. It also may simply spring the lows following point Y. Remember the spring can be a major shakeout or a number one spring, a number two spring or a number three spring. The first two need to be tested. A number three spring does not have to be tested.

2. The Wyckoff Wave can rally through the resistance at the top of the trading range. In Mr. Evans terminology, this is called jumping the creek. This would also be a Sign of Strength (SOS). There would then be a backup to the resistance (creek) for a Last Point of Support (LPS).

If this happens, how far can the Wyckoff Wave advance. While the count is not yet complete, the attached Point & Figure chart gives us a maximum objective of around 2,900 points. This would take the Wyckoff Wave to around the 33,000 level. This is within the objective range taken back in the original trading range. There the minimum objective was 32,200. The maximum objective was 37,002.

It is also important to remember that if this happens, the trading range was re-– accumulation and we could see other periods of re-accumulation before the end of the rally. In addition, there may well be a Sign of Strength and a Last Point of Support that would give us a higher objective.

We should also pay attention to the H – P support line, which could well become the support line of an intermediate term up trend channel. Notice how the Wyckoff Wave is approaching this support line. Based on the relative strength of the Wyckoff Wave, one could expect the ending action will occur at or before the Wyckoff Wave reaches this line.

Finally, while there is a good possibility the scenario described above will take place, a good trader always assumes and prepares for other possibilities. In this case, it would be a reaction back towards the resistance/support line drawn from point K. If this happens, it can still be a bullish indication and if supply dries up there will be an important Last Point of Support.

An upthrust of the trading range would be a good indication that this scenario would play out.

However, if this does happen, the Technometer will quickly become oversold making the Wyckoff Wave vulnerable to a rally.

While every day this trading range looks more and more like accumulation, it is best to wait for ending action before entering the market on a short-term basis or taking additional intermediate or long term positions.

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