Trends and Trading

Click Here For Wyckoff Wave Chart 06-28-2013

Wyckoff students usually follow four different trends. They are intra-day, short term, intermediate-term and long-term trends of the market, or an individual stock.

These trends are identified on the vertical line chart as channels. In an up trend, the channel is formed by drawing a support line between two successive reaction lows. A parallel supply line is drawn from the high between those two points..

Conversely, in a down trend the channel is formed by drawing a supply line between two consecutive rally highs. A parallel support line is drawn from the low price between those two points.

Intra-day trends last from hours to days. Short term trends last from days to weeks. Intermediate-term trends last from weeks to months and long-term trends last from months to years.

It is extremely important to trade with the trend of both the market and your individual stock. The trend is based on your trading objectives. Intra-day traders should trade with the intra-day and sometimes short term trends. Swing traders with the short-term trends. Longer-term investors should trade with the intermediate and long-term trend channels.

The Wyckoff trader should be very aware of each one of the above trends in every stock followed and, of course, the general market (Wyckoff Wave).

One reason Wyckoff students rarely talk about their trades is that it is completely feasible that two students could, at the same time, have opposite positions in a particular stock. The student trading for intermediate term gain could have a long position. However if the short-term trend of the market is down, another student could have a short position in the same stock.

One of the most important Wyckoff rules is to trade within the trend. These trend channels, along with the Wyckoff tools (Optimism – Pessimism Index, Technometer and Force Index ), help the Wyckoff trader identify entry and exit points that results in a higher percentage of profitable trades.

Let’s look at where the Wyckoff Wave stands, relative to each one of its trends.

The intra-day trend is neutral, but will probably change to down on Monday.
On Monday, June 24th, the Wyckoff Wave broke its intra-day down trend channel at point E. A new up trend channel was established with support line D – G and supply line F.

The trends first sign of trouble occurred when it was unable to reach the supply line at point F. The Wyckoff Wave then reacted and weakened the intra-day uptrend channel as it moved down to point G. The Wyckoff Wave then moved sideways but had a poor quality intra-day rally to point H. A tentative intra-day down trend channel has been drawn in blue, with supply line F – H. The parallel temporary support line is drawn through point G. If the Wyckoff Wave continues to react on Monday, the intra-day down trend channel will become the channel drawn in blue on the intra-day chart.

The intra-day trader should also be looking at the short term down trend channel. On Thursday, the Wyckoff Wave tested the supply line of the short term up trend channel at point R. The poor quality of the day’s market action suggested this would be a successful test.  It is also shown, more clearly, on the intra-day chart as the move to point F was unable to approach the supply line.

The intra-day trader now has two entry points. The first is in the area of point F. The second is the poor quality rally to point H.

The short-term trend is now down. The supply line is drawn from point J through point N. The parallel support line is drawn through point M.

In late May, the Wyckoff Wave rallied to point J and then weakened the then short term up trend channel as it reacted to point M. It then rallied to point N and broke the short term up trend channel. This changed the short-term trend to neutral.

The Wyckoff Wave moved sideways until reacted to point O. As this was a lower low than point M, the short-term trend changed to down and the new trend channel can be drawn.

Even though the Wyckoff Wave has reacted from point J, the market action has not provided an opportunity for short-term trades to the downside. There are two reasons for this. First, it appeared the Wyckoff Wave was backing up to a support area at point M.
There, the Wave’s Technometer was in an oversold condition and we saw demand come in as the Wyckoff Wave rallied away from the support resistance line drawn from point H.

This week, the Wyckoff Wave rallied poorly to point R and successfully tested the supply line of the short term down trend channel. However, the Technometer is still slightly oversold. The mixed signals, which were discussed in more detail on the daily report, make a trade to the downside more of a high risk venture.

While it is fun to be in the market on a daily basis, it is often better to pick your spots and ensure there is a high risk/reward ratio. While the Wyckoff Wave has the potential to react at least to the halfway point of the intermediate-term (G – J) rally, it also could see support as it tests the Creek area drawn from point B. If short positions were taken at point R, stops need to be closely watched and profits protected.

The intermediate-term trend of the market is up, but slightly weakened.

Intermediate term Wyckoff investors were able to take initial positions, back in January at the first point M. These positions were most probably held and added to as the rally progressed. These positions can be held until the intermediate term uptrend channel is broken. As we are seeing weakness, stop orders should be adjusted to protect profits, but the timing is not as critical as in intra-day and short-term ventures.

The long-term trend of the market is up.

The Wyckoff Wave is solidly in a long-term up trend channel that began almost 5 years ago at the end of the bear market. The long-term Wyckoff investors, who got in at the bottom and have added two positions over the years have seen some very large gains.

During this period the Wyckoff Wave has moved into both oversold and overbought positions relative to this long-term uptrend channel. Long-term investors need to watch how the market behaves as the support and/or supply lines of the uptrend channel our approach. However a slight weakening, as was seen in both points X and D of the weekly chart, do not mean positions should be closed. Again, we need to see a break in the trend channel before action needs to be taken.

No matter what your investment philosophy, trend channels, along with the Wyckoff tools are an excellent way to monitor your trades and identify entry and exit points.