Was The Trading Range Test Completed?

Click Here For Wyckoff Wave Chart 01-29-2016

This past week the stock market, as measured by the Wyckoff Wave, began to test last week’s low at point G. The week began with a reaction off the previous Friday’s high at point H. It was on mixed price spread, but relatively high volume. This suggested some supply was still in the market. However, so far, the Wave has held above point G.

The Wyckoff Wave rallied on both Thursday and Friday. The good news was that it noticeably weakened the short term down trend channel. The bad news was that the rally was not of particularly good quality.

In addition, Friday’s Technometer reading was slightly overbought. The Technometer will open on Monday in an overbought condition. So far, the Force Index, which is producing moderate negative readings, has no impact on an overbought Technometer.

The Optimism – Pessimism Index is in a very short-term negative divergence with the Wyckoff Wave, when compared with point H. However, if the Wave rallies on Monday that divergence will be eliminated. Therefore, it is not included in this market analysis.

The weakening of the short-term down trend channel is a positive indication. However, the previously mentioned presence of supply and Thursday’s and Friday’s poor quality moves to the upside, suggests the test of the trading range bottom is not yet complete.

It also appears that the Wyckoff Wave will have problems continuing its advance. There should be some resistance at both point H and the support line of the intermediate-term downtrend channel, that is drawn in red.

The best case bullish scenario would be a reaction on reduced price spread and volume that holds above the short-term down trend channel’s supply line. This would not only break the trend, but successfully test the low at point G. That would give the Wyckoff Wave an opportunity to rally back towards the top of the trading range.

Some could say there is already been a successful test as Wednesday’s and Thursday’s low held above point G. This scenario would allow the Wyckoff Wave to rally strongly next week towards the top of the trading range. While that is certainly possible, the overbought Technometer and the lack of strong demand, on Thursday and Friday, significantly reduce that scenario’s probability of success.

Let’s look at the intra-day chart. Thursday’s market action begins with a major gap opening to the upside and a brief 5 min. follow-through to point W. Then supply came into the market and the Wyckoff Wave reacted to point K. Notice that after the first strong intra-day wave to the downside, both price spread and volume were reduced, as supply dried up.

After a brief rally to point Y, the Wyckoff Wave reacted to point Z. There was little demand on the rally and little supply on the reaction. The Wyckoff Wave spent the rest of the trading day in a poor quality rally that was marked by numerous small intra-day waves.

After a relatively small gap opening to the upside, on Friday, the Wyckoff Wave put in a strong 25 min. intra-day wave to point A. Good demand came into the market. However, as you can see on the intra-day chart the Wyckoff Wave reacted and then moved sideways to point B. It then made another attempt to rally. The trading day ended with a strong, 60 min., move to the upside. On the surface, this appeared to be a positive day.

Before confirming that conclusion, let’s look at both the first and last intra-day waves. They contained of most of the day’s advance. On the first intra-day wave, which ended at point A, the Wyckoff Wave gain 264 points. The intra-day volume was a little over 30 million shares. On the last intra-day wave, the Wave only gained 229 points. The volume was a whopping 166 million shares.

The last intra-day wave was slightly narrower than the first. However, it contained over five times as much volume. This suggests supply is still present.

This intra-day review, of Thursday’s and Friday’s market action, confirms the analysis from the vertical line chart. To far, the rally has not been of good quality. This continues to suggest that the Wyckoff Wave still needs to put in a successful test of the bottom of the trading range, before it can rally and continue developing the range.

The trading range is also seen on the weekly chart. A support line has been drawn from the Selling Climax at point L. A resistance line, marking the top of the trading range has been drawn from point O.

Due to the presence of supply, it is still possible the Wyckoff Wave could react through the trading range. This would result in either a Spring or a Sign of Weakness. Remember the old adage about Springs in a down trend. That’s another reason why a reaction that breaks the downtrend is important for the bulls.

What will happen? I’m sticking with the successful test scenario, but this is a week to closely watch the stock market.