Wyckoff investors and traders can look at the stock market with two very different perspectives.
The short-term Wyckoff trader is looking for turning points that will allow a reasonable return during a very short time. This can range from the same day to a week or two.
The intermediate or long term Wyckoff investor is not as interested in the market’ s short term twists and turns, but expects to hold positions that last from between a few months to several years.
The short-term trader tries to anticipate turning points, while the longer term investor looks for confirmation of Wyckoff indicators, before taking positions.
Back in the day at the old Stock Market Institute offices in Chicago, discussing individual stocks was not encouraged. That is because a short-term trader might have a position to the downside, while an intermediate term trader held a long position. Both were correct and both would return a profit, but each person was looking at the stock from a totally different perspective.
Depending on our perspective, today’s market is also sending us different and sometimes confusing signals.
Let’s first look at a short-term perspective.
A week ago Friday the Wyckoff Wave had rallied to point N. As mentioned last week the last three days of the rally were on relatively reduced spread and volume. In addition, the Technometer had moved into an overbought condition and the Optimism – Pessimism Index was in a negative divergence with the Wyckoff Wave when compared with the last high at point L.
This appeared to be a turning point and an opportunity for short-term traders to take short positions in stocks that were weaker than the Wyckoff Wave.
If one anticipates a turning point, the expected market action to follow should also be considered. Supply should command and we should see a positive move to the downside.
The day following point N was on reduced price spread and increased volume. That would suggest that some demand was probably present. The following day was a little better for the bears. The price spread increased, but the volume stayed the same. Some demand came in late in the trading day.
The good news was that the Wyckoff Wave had closed back in the trading range and appeared ready to continue the reaction. That didn’t happen.
Wednesday brought a poor quality rally on reduced spread that increased volume. We are now three days into the expected reaction and the market has made little progress toward the downside. The market is not behaving as expected. While Wyckoff traders may have small gains, stop orders should have been moved to cover profits and the traders should be poised to exit the market if demand returns.
Thursday was a very critical day. The Wyckoff Wave rallied on increased price spread. While the volume was lower than on Wednesday, it was relatively high. Demand had come back into the market. This was a short term change in character.
The market was not behaving as expected when decisions were made at point N. The disciplined Wyckoff traders closed their short positions, or were stopped out.
The wishers and hopers. The let’s see what one more day brings. The maybe it will react in a few days traders held their positions. Some may have even moved their stops to accept the fact that the market might rally.
Which camp are you in?
What will happen to the Wyckoff Wave on Monday? I simply don’t know. When I don’t know, I don’t want to be a short-term trader.
I do know that the market did not do what I expected it to do at point N. So, until I get a more positive indication to the future short-term direction of the market, I am retreating to the sidelines.
If the market reacts on Monday and successfully test the highs at point N, I may return, but only if I am not chasing a stock.
It is far better for the short term trader to miss out on an opportunity than to lose precious capital.
The intermediate or long term investor is not that interested in either of the short term scenarios. Until they see a positive and confirmed ending action, they are holding existing positions and waiting for new opportunities.
Will these opportunities be bullish or bearish? Rather than anticipating turning points, the investor looks at the overall trend of the market and anticipates what its future direction will be. For this analysis, let’s move to the weekly chart.
As has been discussed in the past, the Wyckoff Wave reached the supply line of its long term up trend at point U and then moved sideways. It has stayed in this trading range for the past 10 months. In doing so, it moved out of the long-term uptrend channel on its reaction to point D. It then rallied and is now testing the channel’ s support line.
If this test is successful, does that mean the Wyckoff Wave will react strongly?
In that scenario, the move from point C down to point D must be considered a Sign of Weakness and the rally back to the support line would be a Last Point of Supply.
Or, is there a scenario that makes point D a spring and is the present rally a Sign of Strength? The weekly chart provides clues in answering the significant questions.
A Sign of Weakness is usually preceded by an upthrust. An upthrust is usually preceded by a Buying Climax. While point U may look like climactic action on the weekly chart, it is certainly not a Buying Climax on the daily chart.
More significantly, the move to point C cannot be defined as an upthrust. Point C brought us a wider spread and strong close. In addition and more importantly, supply did not come into the market. Instead, the Wyckoff Wave experienced a long slow six-week reaction back down into the resistance area (Creek). This is not indicative of ending action and preparation of a move to the downside.
What about the spring scenario?
Just like seeing strong supply come in after an upthrust, strong demand follows a spring. It is taken six weeks for the Wyckoff Wave to rally from point D to point E.
Take a look at the accumulation area marked by points X and H. The low at point H was a beautiful spring. Look at how demand came in and over the next month drove the Wyckoff Wave all the way up to point K. Compare that move to what we are seeing now.
While the spring scenario has a higher probability of success than the upthrust scenario, it is doubtful either would be fulfilled.
If we look at the trading range after point U, there is a tendency to see higher tops and higher bottoms and, most importantly, the individual moves are long slow and basically boring. This screams accumulation.
However, that will only be confirmed by ending action. Right now it would seem that intermediate and long term traders should be content with living in a trading range with a bias to the upside.
This would mean position could be taken at the bottom of the range and held as the market rallies and reacts before we see a final ending action.
Hopefully, these two perspectives have been helpful. Always look at the market from your specific trades perspectives, knowing it may be different from your neighbors. If you are in a short term trading mode, avoid looking at the market from a longer-term perspective and vice versa.
With the acquisition of some excellent video software, I am creating some new videos on how to use the charting service. I am also updating older videos.
The latest video is how to identify relative strength and weakness, when comparing individual stocks to the Wyckoff Wave. If you are interested, just click this link to play the video. http://wyckoffstockmarketinstitute.com/Videos/Relative-Strength-Weakness/relative-strength-weakness.htm