I get lots of e-mails. Since I am somewhat bullish, most are from the bears who are happily waiting for a significant decline. They cite existing market conditions and often include references to the financial instability we are seeing in both Europe and the United States.
This week, I thought it might be helpful to take a look at both sides of the argument, from a Wyckoff perspective. The good Wyckoff trader or investor always tries to analyze opposing views.
The bears can make the argument that the Wyckoff Wave was in distribution from at least point A to point I, and possibly all the way over to point U. They can then call the move from point I to point J a sign of weakness (fall through the ice) and the rally to point K as a Last Point of Supply.
They can then point out fairly substantial downside objectives on the 100 Point & Figure chart, which is attached to this post.
The chart contains three phases: phase A (point I to point A) is 2,500 points. The objective is between 29,000 and 29,500. When phase B is included, the objective is from 27,400 to 27,200. The maximum count to include phase 3 produces an objective of between 26,600 to 26,400.
The phase A objective is right at the top of the November – December trading range (marked in blue on the chart). The phase B objective is in the area of the top of the August – September, 2011 trading range. The phase C objective returns the Wyckoff Wave back into the August – September, 2011 trading range.
The bulls can counter by saying that the trading range from point U over to point F was accumulation and that point F was a spring. They will also counter the bear’s distribution argument by stating there was no ending action (upthrust) at point I.
They will also say that the Wyckoff Wave is still in a long term up trend channel. This channel is shown in orange on the attached weekly chart of the Wyckoff Wave. While the Wyckoff Wave is testing that important support line, it is approaching the support line in an oversold condition relative to the Technometer. There are also significant positive Optimism – Pessimism Index divergences with the Wyckoff Wave, when compared with every support point going back to point V. In addition, the low negative numbers produced by the Force Index, coupled with the dangerously oversold condition of the Technometer, suggest the Wave may be vulnerable to a nice rally.
Finally, the bulls offer the notion that a bear market happens quickly and decisively. If the bear market began at point I, they suggest the market should have moved quickly to the down side on widespread and volume. Instead there was a long, slow reaction to point J. Then, the rally to point K took six trading days.
While both sides make interesting arguments, my sympathies still are with the bulls.
We know for sure that the long-term trend is still up. The intermediate term trend is neutral. The short term trend is down. We also know that the Wyckoff Wave is approaching an important support area, which coincides with Phase A of the 100 Point & Figure chart.
The Wyckoff Wave is also approaching both the support line of the short term down trend channel and, more importantly, the support line of the long term up trend channel. The significant areas, coupled with the dangerously oversold condition of the Technometer, strongly suggest that the Wyckoff Wave will attempt to rally. If it rallies we will see a shortening of the thrust when compared to the move from points I to J. There is also the possibility the short term down trend channel could be weakened. None of this is conducive to a strong reaction.
While the Wyckoff Wave certainly had a poor test of the spring at point F and then a lower bottom at point J, this does not necessarily mean we are headed for doom and gloom. The Wyckoff Wave could rally, we can the supply line and then test everything at a higher level. We could also see a new phase of the trading range as the overhanging supply continues to be worked off.
In summary, the lack of ending action in the form of an upthrust, the long slow reaction from point I, the dangerously oversold condition of the Technometer, coupled with a very moderately negative Force Index and the strong Optimism – Pessimism Index do not signify a significant market downturn.
In my opinion, the jury is still out. We should stick with the long-term, intermediate term and short term trends until they tell us otherwise.
While there may not be opportunities to the upside, everyone except aggressive short-term short traders should quietly watch and wait. Let the market action, not the news, influence your trading decisions.