Unexpected Behavior Brings Out Relative Strength

Jim OBrien Week In Review 0 Comments

Click Here For Wyckoff Wave Chart 09-26-2014

In a perfect world, the Wyckoff student would like to see a relatively stable trading range encased in horizontal trend lines reflecting support and resistance.

In periods of accumulation or re-accumulation, this should be followed by ending action, usually in the form of a spring.

The spring is followed by a Sign of Strength and a Last Point of Support. If the Sign of Strength is within the trading range, there would be a second Sign of Strength (Jump Across the Creek) and a final backup to the top of the trading range for a Last Point of Support.

Unfortunately, we don’t live in a perfect world. There are times when the market doesn’t behave in this wonderfully structured way. That is also why trading in the market is an art, not a mechanical event.

Presently, the Wyckoff Wave is going through one of these less-than-perfect trading ranges. As you can see on the attached chart, several lines marking the top and bottom of the trading range have been drawn as the Wyckoff Wave found different levels of support and resistance.

The resistance and support lines not only help define the trading range, but it is very important to watch how the Wyckoff Wave behaves as it approaches and tests them.

This trading range has been a bit confusing. The Wyckoff Wave has not had a “perfect world” journey has sent us some mixed signals as it penetrated the top of the range.

When this happens, it is helpful to go back and look at the trading range in more detail. This gives the Wyckoff student an opportunity to review turning points and decide what really happened.

While the Wyckoff Wave has been in this trading range since early March 2014, An important phase began when it ran out of demand at point H and reacted to point I.

The support line drawn through points I, M, O, and Q appeared to form the bottom of a nice tight trading range. However, after a poor rally to point V, the Wyckoff Wave reacted through the support line on good price spread and volume. It then reached and penetrated another support line drawn from point C.

Was point W a spring? The spring is defined by the penetration of the bottom of the trading range. After the support lime was penetrated, good demand comes in drives (springs) the stock back into the trading range. The rally is on good price spread and volume.

In addition, supply needs to stay the same or decrease before the spring occurs.

While supply stayed moderate and the Wyckoff Wave penetrated a support line at point W, good demand did not come into the market. In addition, while the Wyckoff Wave was in a positive divergence with the Optimism – Pessimism Index, the Technometer moved quickly into an overbought condition.

While the Wyckoff Wave rallied to point X, it was on relatively narrow price spread and low volume.

Finally, the slightly increased volume around point W indicates this would’ve been a #2 spring. #2 Springs need to be tested. There was no secondary test. The Wyckoff Wave simply rallied off the bottom of the trading range.

This would strongly suggest that point W is not a spring and the Wyckoff Wave simply rallies off the bottom of the trading range.

This eliminates any ending action and the Wyckoff Wave should continue to move within a trading range until that occurs.

Nothing really changed on the move to point X. The narrow price spread and low volume continued and the Technometer became dangerously overbought. This indicated that the Wyckoff Wave was ready to react back into the trading range.

Instead, it moved sideways to point Z and then reacted briefly to point A. While price spread remained fairly narrow, the relative volume increased. This suggested demand was still present.

However, the Wyckoff Wave’s relatively poor quality rally off point W suggested it was not ready to “Jump the Creek” and move into new high ground. In addition, the relatively high price spread from points Z to A did not indicate supply was drying up.

The prevailing scenario was that the Wyckoff Wave would test point Z and resumed its reaction back into the trading range. That didn’t happen.

Instead, the Wyckoff Wave rallied off point A on wide price spread, but moderate volume. Even though it penetrated the top of the trading range the price spread decreased and volume increased. This indicates supply was coming into the market.

When the Wyckoff Wave put in a higher low at point A and a higher high at point B, the short-term trend of the market was changed to up and the trend lines are drawn in blue on the attached vertical line chart.

Was the rally to point B a “jump across the creek”? While the jury is still out, the lack of distance between the top of the trading range and point B is an initial sign.

While the reaction back towards C started out with the relatively narrow price spread, volume stayed relatively high. Then, on Wednesday and Thursday the Wyckoff Wave rallied and then reacted on wide price spread and good volume. The Wyckoff Wave also tested the support line of the new short-term uptrend channel.

Friday brought a poor quality up move off the support line.

The Wyckoff Wave has not behaved in an expected manner since point W. First it rallied poorly and then, when it reached the top of the trading range, didn’t react as expected,. It is extremely important that this relative strength must be taken into consideration when analyzing what the Wyckoff Wave will do next.

Presently, the Wyckoff Wave is testing support at both the top of the trading range and its new short-term support line. The relatively high volume and wide price spread of the past three trading days, suggests we are not seeing a Last Point of Support.

The Wyckoff Wave could rally and then react again on reduced price spread and volume. That could possibly set up a Last Point of Support.

It could also rally and test point B and then move sideways. This would create a new phase of the trading range that has, for the most part, put in higher tops and higher bottoms.

There is always a possibility that the Wyckoff Wave could simply react back into the trading range and continue its sideways move.

While all these could happen, when reviewing market action, the relative strength that we have seen over the past two months must be included in our analysis.

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