Waiting for Godot

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Samuel Beckett’s 1953 play, in which two characters, Vladimir and Estragon, wait endlessly for the arrival of someone named Godot, is beginning to summarize action in the stock market.

This past week, we waited for the market to noticeably react. Instead, it moved sideways, although it did show signs of reacting on Thursday and Friday.

Often times a review of the intra-day market action can provide some clues as to the markets short-term future direction. This may be the case now, as the intra-day chart of the Wyckoff Wave appears to be presenting a distribution trading range. The operative word is “appears”.

The intra-day chart is presented as a line chart that begins on July 13th. On that day the Wyckoff Wave had an intra-day Buying Climax at point D. Then it moved sideways and established resistance and support points within the trading range.

Stock Market Institute legend, Robert Evans, always reminded us that resistance and support points are not horizontal lines. The resistance and support lines are drawn to connect the different levels of resistance and support. When these levels are penetrated, it signals a change in character. Therefore, it is quite important to watch market action if a stock or index attempts to leave its trading range in any direction.

It is also important to understand that leaving an intra-day trading range is far less significant than leaving a trading range that would be defined on the daily vertical line chart.

However, important moves have small beginnings and that’s why it is helpful to watch intra-day market action.

The Wyckoff Wave established a resistance line drawn from point D through points J, L, N and R. Notice there are two levels of resistance and two levels of support. The first at the top of the trading range. The second at the bottom. These are only visible because, instead of a horizontal line drawn from a resistance point at the top of the range and a horizontal support line drawn from the bottom, the staggered lines allow us to see the entire area of resistance or support.

This noticeable move to the downside began at point R and the Wyckoff Wave reacted through the trading range on relatively wide price spread and decent volume. It reached its low at point V.

What was this decline? Was it a Sign of Weakness and the beginning of a new intra-day down trend? Or, were we seeing a Shakeout? If the move was a Shakeout, it would need to be tested on the next reaction towards point V.

On Friday, the Wyckoff Wave rallied to point W. Notice that it penetrated the lower support, now resistance, line drawn from point I. However, the Wyckoff Wave also put in support, now resistance, at points O and Q and if that level is factored in, the Wyckoff Wave could be rallying to put in an intra-day Last Point of Supply.

Which of these two scenarios has the highest probability of success? Even though the Wyckoff Wave has rallied nicely and is testing the support, now resistance, line drawn off point Q, the rally has been on reduced volume. In addition, most of Friday’s market action was a long slow up wave which also indicates a lack of demand.

A Shakeout or a #1 Spring requires strong demand to come into the market. This is signified by wide price spread and increasing volume. This suggests the move to point V was not a Spring.

That suggests we could be looking at an intra-day Last Point of Supply. This will be confirmed early Monday as the Wyckoff Wave will either continue to rally back into the trading range or react back down towards point V.

If the Wyckoff Wave rallies, it is simply return to the trading range and it will continue to move sideways until it makes another attempt at ending action.

If the Wyckoff Wave reacts, it will be important to watch the quality of the reaction. If the Wyckoff Wave did put in a Last Point of Supply, there will be a strong move to the downside.

If, despite the poor quality rally to point W, the Wyckoff Wave reacts on reduced price spread and volume, there is still an opportunity to successfully test the new Spring. If that test is successful, the Sign of Weakness scenario would be replaced by the Shakeout scenario.

It is also important to review the daily vertical line chart and see how it compares to the intra-day line chart.

As you can see, the Wyckoff Wave has rallying off point D, but is now beginning to “roll over”.

It appears demand is being withdrawn and the Wyckoff Wave is in a position to react back and test, not only the resistance, now support line drawn off point C, but the lows at points D and Z.

This adds credence to the intra-day Sign of Weakness scenario.

While I believe that this scenario has the highest probability of success, one should never, ever, discount every single alternate scenario. If the Wyckoff trader is aware of every possible scenario, he or she will be nimble enough to take advantage of whatever scenario plays out.

Hopefully, Godot will finally arrived this week and we will see some clarity as the Wyckoff Wave makes its next move.