Trend Channels and Trading Ranges

Click Here For Wyckoff Wave Chart 05-30-2014

This week the Wyckoff Wave continued its poor quality rally off the low act point I. The weakness of the rally is supported by the Technometer, which is now in an overbought condition and the negative divergences with the Optimism – Pessimism Index.

What comes next? This is been a rather tedious trading week and the mind wanders and creates different scenarios. Here is an interesting possibility.

The weak rally strongly suggests that the Wyckoff Wave will have a difficult time moving into new high ground. This would give the Wave an opportunity to react back towards the bottom of the trading range. This could be the precursor of ending action in the form of a spring or shakeout.

Presently the trading range is considered a short-term trend. Naturally the trend is neutral.

The length of a short-term trading range is considered to be from several days to several weeks. The trading range began in early March at point U. We are now 12 weeks into the trading range, which is just about at the limit of the short term definition.

The intermediate-term trading range is defined as weeks to months. The current intermediate-term trading range, which is drawn in blue, was confirmed last October at point B on the daily chart and point P on the weekly chart.

The long-term trading range is defined as months to years. The long-term trading range of the Wyckoff Wave is found in orange on the weekly chart.

Notice that while the Wyckoff Wave is at the long-term trading range’s supply line and showing excellent long term relative strength, it is at the support line of the intermediate-term uptrend channel. Any reaction would weaken support line and put the trend in jeopardy.

If the Wyckoff Wave is unable to continue to rally off point I, reacts and moves lower than point I, it will also weaken the intermediate-term trend channel. It also would create a new short-term downtrend channel. The supply line would be drawn from point H through the top of the rally off point I. A parallel support line would be drawn through point I.

The trading range could then become the intermediate trend, which would be changed neutral.

If the Wyckoff Wave springs the trading range, the spring will be confirmed if the rally off the spring weakens the new short-term downtrend channel. If the reaction to the secondary test holds above the channel’s supply line, the short term down trend channel would be broken.

Will it happen? There’s a fair chance it will, but the Wyckoff Wave could easily continue moving sideways and we will continue to wait for ending action.

If it does happen, when? The Wyckoff Wave will probably answer that question during the month of June.

This blog will be on hiatus for the next couple of weeks. This week my wife will be undergoing major cancer surgery and I will be quite focused on her condition.