Using the Wyckoff Tools to Find Turning Points in The Market
Click Here For Wyckoff Wave Chart 04-04-2014
Every stock market trader is always trying to find the exact time and place where the market changes direction. Positions taken at these points lead to the best profits.
However, that is easier said than done and sometimes the trader can be completely fooled as the market does not behave as anticipated.
The Wyckoff tools consist of the Optimism – Pessimism Index, the Technometer, and the Force Index. The Optimism – Pessimism Index is simply a volume index of the stock it is related to or, in this case, the total volume of the Wyckoff Wave stocks.
The Technometer, which, for over 70 years, has been a very effective tool in determining overbought and oversold conditions. A reading of 50 is considered to be an overbought condition. A reading of 38 is considered to be an oversold condition.
The Force Index is also a moving average. It is used to measure the amount of pressure on the market. In most cases it is a negative number.
These three tools are strictly related to volume. They are not measures of price. It is the volume that determines the amount of supply and demand in the market or individual stock. These three Wyckoff tools examine the volume of each individual intra-day wave and then, come to their conclusions.
The Optimism – Pessimism Index changes are recorded on a daily basis. The Technometer and Force Index are moving averages.
Let’s examine the market over the past 10 days and see how these Wyckoff tools helped us identify Friday’s turning point.
On Thursday, March 27, the Wyckoff Wave reacted to point V. While point V was higher than point W on the vertical line chart, the O – P Index was lower than at point W. This was a positive divergence. This indicates the effort put in by the O – P Index did not match the results of the price as shown by the Wyckoff Wave. When the O – P’s Index and the Wyckoff Wave are not in harmony, some sort of turning point should be expected..
In addition, the Technometer moved into a dangerously oversold condition. This added fuel to the fire that the down move would have a difficult time continuing.
The Force Index also got into the act and was, like the O – P Index, in a positive divergence with the Wyckoff Wave.
This would suggest the Wyckoff Wave would rally and last week, it did.
However, does that automatically mean that new positions to the upside are justified at point V?
Before new positions can be taken, the Wyckoff student should always look at the market, and individual stock, from a longer-term perspective.
Back in January, the Wyckoff Wave then rallied to an all-time high. It then reacted rallied back to point R. Notice that points R, T and X held below the January highs. Intra-day, Wyckoff Wave briefly moved into new high ground at point V, but immediately ran into supply and reacted.
Look at the O – P Index. While the Wyckoff Wave was unable to move into new high ground, the O – P Index did. This is an intermediate term negative divergence and must be considered when looking at a short term change in trend. This would suggest the Wyckoff Wave would probably meet some resistance as it attempted to rally into new high ground.
Taking a position at point V was a high risk opportunity. The Wyckoff Wave was not too far below the top of the short-term trading range. Good supply had come back in at points V and X. In addition, there was no ending action.
The short-term positive O – P divergence conflicted with the intermediate-term negative capital O – P divergence. These indications substantially increase the risk/reward ratio.
It would’ve been nice if the Wyckoff Wave had declined on Friday and experienced a spring. Then, there was a quantitative reason to take a position to the upside.
Unfortunately for the bulls, that didn’t happen. Instead the Wyckoff Wave began to rally.
The rally was on relatively lower price spread and volume. There was reduced price spread and volume on Friday and Monday.
On Tuesday, the Wyckoff Wave moved through the top of the trading range, but did so on slightly reduced price spread and increased volume. This was an indication that supply was present. Regardless, it was certainly not reminiscent of a Creek jump.
Instead, the Wyckoff Wave was moving into new high ground on a lack of demand.
This is dramatically shown in the relationship between the Wyckoff Wave and the Optimism – Pessimism Index.
Although the Wyckoff Wave did move into new high ground on the rally to point Z, there was little response by the O – P Index. Look at the comparison with the Wyckoff Wave and the O – P Index at point Z, with points X, V, T and R. It showed there was very little effort on the rally to point Z. In addition, the Wyckoff Wave moved into a nearly overbought condition on the Technometer and was briefly overbought on Friday morning.
By moving into new high ground, the negative divergence with the January highs was eliminated.
The Wyckoff Wave is also at a higher level and there was ample room to react within the trading range.
Conditions appeared right for a nice reaction an on Wednesday evening, the Wyckoff Pulse of the Market report gave a sell signal to aggressive short-term bears.
On Friday, the Wyckoff Wave experienced and intra-day failure to the upside and reacted strongly to close at its low for the day. The reaction was on increased price spread and volume and there is a reasonable probability that it could react to the bottom of the trading range. Remember, this is a short-term trade and positions would only be held for a few days.
One final note. The resistance and support lines of trading ranges are not straight lines. They are drawn to indicate where the stock or index met support or resistance.
The Wyckoff Wave did not jump Creek when it moved through the resistance line drawn through points V and X. It simply met resistance at a higher level. This causes a change in the trading ranges resistance line, which is now drawn through the high at point Z.
If the Wyckoff Wave experiences ending action, then rallies and jumps the creek, the resistance line will become the near edge of the creek. The old horizontal resistance line drawn through point X is left in place as a through well become the back edge of the creek.
These Wyckoff indicators are very important in suggesting that a position to the upside taken at point Y had a fairly high risk/ reward ratio. They were also extremely important in identifying Friday’s move to the downside.