This past week, the Wyckoff Wave confirmed its reaction off the high at point X. This was a normal place for the Wyckoff Wave to encounter resistance, as it was testing both the intermediate term downtrend channel’s and short term up trend channel’s supply lines.
The Wyckoff Wave tested this resistance with 10 trading days of relatively narrow spread and relatively increased volume. Any demand came into the market, at this critical time, was neither particularly strong or sustained. Instead, good supply stopped any effort to continue the rally. That set the stage for this week’s reaction.
While the Wyckoff Wave is reacting, what type of reaction is it and where is it headed?
As of Friday, the Wyckoff Wave was encountering some support at two critical support areas. They are the support area of a trading range that began in October (line drawn from point E) and the support line of the intermediate-term downtrend channel. The Wyckoff Wave is also testing the top of the September move to point T.
Before continuing, let’s take a longer view at the Wyckoff Wave, from an intermediate term perspective.
Looking at the market action to the right of the Selling Climax at point Q suggests a possible developing trading range. We saw an automatic rally to point R and a secondary test at point S. The Wyckoff Wave then established its first resistance point at point T and first support point at point U.
As the Wyckoff Wave rallied off point U it did not successfully test point T but continued back into the old trading range. There was a brief pause at point V and the Wyckoff Wave moved sideways before rallying to point X. This rally moved the Wave substantially above point T.
Was the move from points U to V a sign of strength? The volume levels suggest it wasn’t. A Sign of Strength is strong demand coming into the market and driving a stock or index through an important resistance area.
The Wyckoff Wave rallied off point U on reasonable price spread and volume and three days later experienced a wide price spread and high volume. While this was a good start, the Wyckoff Wave has yet rallied past point T. If this move was going to be a Sign of Strength, sustained demand needed to be present. Instead, price spread narrowed and the volume decreased every trading day until the Wyckoff Wave reached point W.
Even though the Wyckoff Wave moved into new high ground, the characteristics of the move did not resemble a Sign of Strength.
The Wyckoff Wave then moved sideways and rallied to point X. With the exception of one trading day, the price spread was relatively narrow. However, look at the volume. From point W, through Friday, the volume has been relatively high and increasing.
This suggests the presence of significant overhanging supply. This supply is taking in the demand coming from those who think the market is ready to bounce and continue the rally. However, as shown by the lack of sustained demand, supply is winning the battle. This led to this week’s reaction.
Back to Friday’s market action.
The Wyckoff Wave is behaving as expected, if we are in the early stages of an accumulation trading range. After a Selling Climax, the expected bounce brings out some demand. To discourage these buyers, demand must be absorbed and the market needs to react. The selling is not climactic in nature, just professionals selling to overcome demand and discourage more buying.
It will be interesting to see how the Wyckoff Wave behaves as it works through this support area. There may be enough demand to produce a small rally that will test the high at point X. If the test a successful the reaction can continue. The Wyckoff Wave seems to have confirmed its presence in its intermediate downtrend channel. The intermediate trend is down and nothing is happening that would confirm any changes in trend.
However, it is possible there is enough overhanging supply to overcome any new buying and the Wyckoff Wave will simply continue its reaction.
Either way, the trading range should continue and the Wyckoff Wave has a good probability of testing the support at point S and U.
The intermediate trend is shown on both the daily and weekly charts.
If the accumulation trading range scenario proves to be correct, the next support point will signal a new trading range phase. That will be important to consider when taking a count on the 100 Point & Figure chart as objectives to the upside are calculated.
This trading range could last a while and patience may become the most prudent course of action.