Waiting For Something To Happen

Click here to open the attached charts

This past week, the Wyckoff Wave reacted by 73 points or 1/10 of 1%. We are still waiting for Godot to make an appearance.

The Wyckoff Wave has been in a narrow sideways movement for the last 13 trading days. On Wednesday, July 13th, the Wave closed at 43,168. On Friday it closed at 43,158. That is about as flat as a market can be.

An old stock market saying says “If you can’t find any reasons to do something, don’t do anything”. That axiom has been certainly true for the last three weeks. Sometimes, those of us interested in the market and who enjoy making short-term or swing trades, seem to always want to have a position, so we can be involved in market action.

Over the years, I realized that I didn’t need to be in the market all the time, but became much more successful once I learned to pick my spots and had, not only a legitimate reason to place a trade, but also an objective that was in sync with the trend of the market.

Therefore, short term, intermediate-term and long-term traders should either be out of the market or maintain their long positions.

While the Wyckoff Wave has begun to suggest a likely reaction is in the near future, it needs to be confirmed and tested before new positions can be considered. I became a better trader once I learned to let the market come to me and not force the action.

That doesn’t mean we  shouldn’t keep a close watch on what is going on in the market. We can just do it from the sidelines. In fact, the intra-day chart of the Wyckoff Wave presents a developing trading range. While the market action may be helpful to day traders, who will continue to trade the market, it also can provide clues as to the market’s future short-term direction.

It is also helpful to compare the intra-day line chart with its Optimism – Pessimism Index. The index, which is strictly a measure of volume, presents the effort that is being put into moving a stock or index in a particular direction. The price is the result of this effort.

When both the line chart, which represents price, and the Optimism – Pessimism Index chart are in harmony, it is reasonable to assume the present move will continue. However, when they are not, we could be seeing a turning point.

Our new charting service allows us to view the Wyckoff Tools, including the Optimism – Pessimism Index in 5 min. intervals. It is an extremely helpful feature. It gives us an insight into the intra-day relationship between price and volume that has never, before, been available That’s what we are seeing on the attached intra-day chart.

On July 14th, the Wyckoff Wave put in an intra-day Buying Climax at point D. Then, it began to move sideways. There was an automatic reaction to point E and a secondary test at point F. This confirmed the Buying Climax and indicated an intra-day trading range was beginning.

Notice that point D on the O – P Index chart is lower than an earlier high. This intra-day negative divergence indicated it will be difficult for the Wyckoff Wave to advance beyond point D.

The Wave reacted to point G. Notice point G on the O – P Index. It is substantially lower. This is an intra-day positive divergence, which suggests the noticeable effort coming in on the downside was not matched by the price. This suggests the Wyckoff Wave will rally. It did just that and moved back to the top of the trading range.

The Wyckoff Wave tested the top the trading range at point R. Once again, there is a negative divergence with the Wyckoff Wave when compared with point F. While the divergences is relatively mild, it does suggest that the effort being made to advance the Wyckoff Wave is not as strong as would be expected.

The Wyckoff Wave reacted rather sharply off point R, as it moved down to point V. Initially, this appeared to be an intra-day Sign of Weakness. However, notice the O – P Index. Point V was slightly higher than point G on the O-P Index, but noticeably lower on the intra-day line chart.

This challenges the Sign of Weakness scenario and, sure enough the Wyckoff Wave rallied to point E.

At points C and E the Wyckoff Wave was back at the top of the intra-day trading range. However, on the O – P Index it has moved into new high ground. This created another negative divergence, when compared to point R. There was also a very short-term negative inharmonious action with the Wyckoff Wave between points C and E. As a result, the Wyckoff Wave reacted sharply.

It is quite possible the reaction off point E is another potential Sign of Weakness. But, look at the O P Index. On the line chart, point H is noticeably below point V. On the O – P Index it is considerably higher. Another positive divergence. This puts the Sign of Weakness scenario in a bit of jeopardy.

Could point H have been an intra-day Spring? When a stock or index moves through the bottom of the trading range, for a potential Spring, it encounters strong demand. So far, that hasn’t happened. This also puts the Spring scenario in a little jeopardy.

Monday will be interesting day. The Wyckoff Wave will either rally strongly or react. A reaction could signal the end of the intra-day trading range and the beginning of a move to the downside. This would send the Wyckoff Wave back into the trading range that began last August

A rally, especially as little demand is coming into the market, would give the Wyckoff Wave an opportunity to test the top of the trading range and continue moving sideways. It would also change the support line at the bottom of the trading range to include point H.

What will happen? While I’m a little biased toward a reaction, the positive divergence does confuse the matter. So far, that has been offset by the relatively poor demand off point H.

While this is an interesting study, it is just that. There has certainly not been enough cause to take new positions in either direction. We also do not have confirmed ending action.

Monday may bring ending action, or confirmation that the sideways move will continue. I’m looking forward to the answer.