This week, after successfully testing the halfway point at point M, the stock market, as measured by the Wyckoff Wave rallied nicely until it reached the resistance area marked on the attached chart.
Is the market simply fighting through some resistance or are we about to see another short-term reaction back down into the trading range?
There are several indications that further upside progress will be extremely difficult. One of the easiest and most consistent turning point indicators is the Technometer.
The Technometer is a five day moving average that calculates volume taken from both up and down intra-day price fluctuations or, as we call them waves. It is uncannily accurate in identifying when the market is in an oversold condition and ready to rally, or in an overbought condition and ready to react. It is especially helpful to short-term traders who are looking for minor moves within trading ranges.
When the Technometer is at 50 or above, it is considered to be in an overbought condition. Conversely, a reading of 42 to 39 suggests a mildly oversold condition. A reading of 38 and below is considered quite oversold.
On Friday, the Wyckoff Wave’s Technometer closed at just over 50. On Monday, it will open at a higher level. This, by itself, suggests we should expect the market to react.
In addition to the reduced spread, and on Friday, decreased volume, the Wyckoff Wave is sending us other negative indicators.
Notice how the Wyckoff Wave was unable to reach the supply line of the recent uptrend channel at both points J and L. This is an indication of weakness.
We are also seeing a negative divergence when the Wyckoff Wave is compared to its Optimism – Pessimism Index. Presently, the Waves is higher than point L. However, the Optimism – Pessimism Index is lower. This suggests the effort (volume) is not keeping pace with the results (price). When this happens, it puts the continued advance into jeopardy.
Finally, the Force Index is producing high negative numbers. This suggests that the expected short-term reaction will be, on a short-term basis, fairly significant.
Does the Technometer really provide indications of upcoming turning points? Let’s look at the chart. While every Wyckoff indication should be analyzed when identifying potential turning points, we’ll just stick with the Technometer.
At point A, the Wyckoff Wave was in a fairly substantial intermediate term up trend channel. The day before point A, the Wyckoff Wave’s Technometer registered 56. For the next two days it registered 56 and 57. The Wyckoff Wave then reacted to point F.
At point F, the Technometer was at 37. This is a substantially oversold condition. The Wyckoff Wave then rallied to point I. Three days before reaching point I, the Wyckoff Wave’s Technometer registered 58. This is a dangerously overbought condition. Notice that the Wyckoff Wave made little progress before reacting all the way down to point L.
The final reaction to point L was on good price spread and volume. At the time, many felt the market was experiencing a sign of weakness and we would see a strong move to the downside.
The Technometer sent a different message. Two days before reaching point L the Technometer became oversold. By the time it reached point L it was in a dangerously oversold condition. The bears were wrong. The Technometer was right. The Wyckoff Wave returned to the trading range and ultimately rallied to point X.
In the process, it also penetrated the resistance at the top of the trading range and, in Wyckoff terms, jumped the creek. Again, the Technometer gave us some clues as to future direction. It was not in an overbought condition as the Wyckoff Wave reached point X. This suggested the Wyckoff Wave would “back up to the creek” and put in an important last point of support, before entering the markup phase.
However, as we now know, that didn’t happen. Once again, the Technometer gave us an early warning indication that we were going to react.
After a long, slow reaction that ended at point C, the Wyckoff Wave attempted to rally. Two days before reaching point D, the Technometer sent us an overbought signal. This was especially significant as the Wyckoff Wave was becoming more overbought, at a lower level, than it was at point B.
The Wyckoff Wave then reacted sharply towards the bottom of the trading range, before seeing support at point G.
Once again, the Technometer showed us a turning point. Two days before point G it was already sending dangerously oversold signals. The market then rallied strongly back towards the top of the trading.
It appears that we are beginning to get indications from the Technometer that the Wyckoff Wave is going to react. Will it be right again? Based on its track record, there is a pretty good chance a short-term reaction lies ahead.
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.