Trading Ranges & Short Term Trading

Click Here For Wyckoff Wave Chart 05-08-2015

Once again, for the third time, the Wyckoff Wave appeared ready to react through the sideways movement’s support and test earlier lows.

On Monday the Wave rallied on a lack of demand and ran into resistance at point B. This was followed two days of relatively widespread and good volume. The Wyckoff Wave reacted to point C and appeared ready to test the low at point W and possibly at even lower levels.

On Thursday, the Wyckoff Wave rallied on reduced price spread and volume. It was also testing an intra-day support, now resistance line drawn from point R on the intraday chart.

Short-term bears, who had taken positions at points X, Z and B, were enjoying existing profits and looking to add on to them.

However, the stock market is a cruel mistress and Friday’s market action changed everything.

After an extremely wide gap opening to the upside, the Wyckoff Wave continued its rally and retested the trading range highs listed above. Much of this gain was because of the gap opening. While there was some follow through, once again, the Wyckoff Wave encountered the overhanging supply at the top of the range.

What appeared to be the beginning of a reaction to test support points within a trading range, put the Wyckoff Wave right back into this narrow sideways movement. The only thing that changed was the low at point C and Friday’s high eliminated the apex scenario.

Unfortunately, this is what can happen when taking positions in the trading range. Mr. Robert Evans devoted an entire Evans Echo lecture to the subject. It was titled “Stop Purchasing In A Trading Range”.

The Wyckoff student is trained to take positions on Springs, Upthrusts, Secondary Tests and scab signs of Weakness or Strength. When these are not there, or not confirmed, the risk increases.

One way to reduce the risk is to identify what a stock is expected to do on a short-term basis. This should be written down at the end of every trading day. If the stock does not behave as expected, short-term positions should be closed.

This is exactly what short-term traders should have done on Friday. All indications were that the Wyckoff Wave would continue to react. Instead, in the face of that large gap opening and some good follow through, positions should have been closed within the first 15 min. of the trading day.

Because Wyckoff students are trained to select stocks that are weaker than the general market, following this concept still allowed positions to be closed while they were still profitable.

The Wyckoff Wave is at the top of the sideways movement. Its Technometer is overbought and there are significant negative divergences with the Optimism – Pessimism Index.

Based on this, it seems difficult for the Wyckoff Wave to continue to rally. It is quite possible short term opportunities to the downside will be available early next week.

However, the Wyckoff Wave did not behave in the manner expected when the earlier positions were taken. Therefore they must be closed. That discipline is the difference between a successful short-term trader and one who loses capital by holding onto positions when they don’t behave as expected.

That strategy is called “wishing and hoping” and is almost always doomed to failure.

Successful short-term traders are disciplined traders. They are not afraid to take a loss or accept reduced profits. They will enter and exit the market on their terms, regardless of extra commissions that may be incurred if a exit and then quickly reenter the market.

Short-term traders should also be extremely careful when identifying intra-day change in direction. Often what seems to be a spring or upthrust and a sign of strength or sign of weakness isn’t.

The intraday chart contains an interesting example.

On April 30 the Wyckoff Wave moved through intraday support at point R as it reacted to point Z. This appeared to be an intra-day spring. Then the Wyckoff Wave rallied off point Z to point A and then reacted to point B.

Was this a spring, a response to the spring and a secondary test? While that needs to be considered, the answer was no. The Wyckoff Wave rallied to point C, it immediately reacted and put in new low at point F.

A clue that this may not have been an intra-day spring is on the rally to point A. Most of that rally was on a gap opening to the upside. Gap openings have no volume. Therefore, very little demand was present.
One important requirement of a successful spring is that strong demand comes into the market after a support line is penetrated. That didn’t happen and what could’ve been an intra-day spring, wasn’t.

The lesson here is that just because a stock penetrates a support area and then rallies, does not automatically make that a spring. All the requirements of a spring must be present, for the spring to be successful.

As mentioned in an earlier post, gap openings are tricky. The one on Friday made the days market action more negative than positive. There is a good possibility the Wyckoff Wave will encounter that overhanging supply and react.

If it does, the successful short-term trader will jump right back into the market and, maybe this time, enjoy more substantial profits.