Trend Lines & Trading Ranges
Click Here For Wyckoff Wave Chart 04-17-2015
After the April 10th strong move to the upside, on Monday, the Wyckoff Wave experienced an intra-day failure to the upside. It then put in a choppy reaction and has a good chance of testing some important support areas.
While at first it must move through the low at point W, it will be interesting to see how the Wyckoff Wave reacts if and when it reaches support at points K and I.
After reacting off the March high at point T, the Wyckoff Wave was supported at point U. It then put in a poor quality rally, on reduced price spread and volume, to point V. Remember, gap openings don’t count in the price spread.
When the Wyckoff Wave put in a new low at point W, this changed the short-term trend to down and the trend channel was drawn in red on the daily vertical line chart.
Notice that at point W, the Wyckoff Wave was unable to reach the trend channel’s support line. This suggested any rally would weaken the short term down trend channel.
Sure enough, the Wyckoff Wave rallied through the channels supply line into an overbought position relative to the channel.
This week, the Wyckoff Wave began to react back towards its short term down trend channel.
While some may decide to change the short-term downtrend channel and move it through Monday’s high price, I have found it better to leave the original trend channels in place. It is more important to watch the price spread and volume action as an index or stock tests these important support and supply lines, rather than keep adjusting lines to keep the stock within a channel.
In fact, that makes it very difficult to analyze trends and predict scenarios that could cause changes in the trends.
The present condition of the Wyckoff Wave may help prove this point.
Despite the overbought Technometer and negative divergence with the Optimism – Pessimism Index, the Wyckoff Wave is putting in a choppy reaction. Under normal conditions, these two indicators would create a scenario where the Wyckoff Wave would react sharply and possibly all the way to the bottom of the trading range.
The fly in the ointment is the Force Index. The Force Index is a measure of the amount of pressure on the market. In most cases, it is a negative number.
When the Force Index moves into positive territory, it has an impact on the other Wyckoff indicators. As discussed last week, it has a mitigating impact on an overbought Technometer. This usually results in a shorter and shallower reaction, which is what we are starting to see now.
This would suggest it will be difficult for the Wyckoff Wave to react all the way to the lowest point in the long trading range.
With that in mind, let’s return to the down trend channel and the trading range.
Trading ranges are divided into phases. These phases are usually separated by large gaps, like the one between points E and I.
Therefore it is reasonable to conclude that point I is another phase of this long trading range. If the Wyckoff Wave reacts below the initial low of this phase at point I, or the test of point I at point K, it has a possibility to spring the phase of the trading.
This would only happen if supply remained consistent and, when support was penetrated, strong demand came into the market.
This could well begin a new leg in the bull market.
Now, let’s go back to the short-term downtrend channel. If the Wyckoff Wave Springs either points I or K, it will probably do so as it attempts to return to the short-term downtrend channel.
If the spring is successful and the Wyckoff Wave reacts, the short-term trend will change to neutral and after a successful secondary test to up.
That is why it is often helpful to leave trends in place, even when they appeared would become irrelevant.
Will this happen? I simply don’t know. It is certainly a scenario that we should be following closely. Then, if it does there could be a major buying opportunity.
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