The stock market spent most of 2012 moving sideways. While investors may not have seen large capital gain profits, the market may be getting ready for a significant move in 2013. This is best shown using the weekly chart of the Wyckoff Wave.
Last March 7th, the Wyckoff Wave closed at 32,118. It also reached a the supply line of the long term up trend channel and began to move sideways. This is marked this point U on the weekly chart
On Friday, the Wyckoff Wave closed at 32,987. This is a difference of 1,132 or a mere 3 1/2%. The sideways movement also has weakened the long term up trend channel, which has identified market direction since it was created using the 2008 lows. Because of that, the long-term trend is neutral.
The question is, is this sideways movement accumulation and preparation for a return to the uptrend channel and a continued advance, or are we seeing distribution and preparing for a significant decline?
It would appear that we are seeing accumulation and prospects for 2013 are quite bullish.
After reaching the supply line at point U, the Wyckoff Wave reacted to point V. This can be considered an initial support point. Then, there was a rally to point W and then the Wyckoff Wave reacted and tested the support line. In the process there was a spring at point X and the Wave rallied. Notice the higher tops at points Y, A and C, along with higher bottoms at points Z and B.
The move to point A could be called a Sign Of Strength and the reaction to point B could be a Last Point of Support. The Wyckoff Wave then attempted to jump the creek (resistance at the top of the trading range) as a rally to point C. So far, so good for the bulls.
The Wyckoff Wave then began what appeared to be a backup to the creek for a more important Last Point of Support. Unfortunately for the bulls, the backup was unsuccessful and the Wyckoff Wave fell back into the trading range and reacted to point D.
There were those who felt the move to point C was not a penetration of the resistance or creek jump, but an upthrust. In fact, many sold stocks and felt there was going to be a major decline. As we can see, that didn’t happen.
In addition, there were higher tops and higher bottoms after point X and the long slow reaction from point C back to the resistance. If we were seeing an upthrust, the decline would’ve been fast and on wide spread and increasing volume. When supply comes into the market, it is a dominant force and reactions are decisive and much more orderly than rallies.
The Wyckoff Wave simply was not ready to begin the markup phase and returned to the trading range. The Wyckoff Wave had reached the 2007 – 2008 distribution area and a great deal of supply was being dumped on the market by long-term investors who could finally get out even.
The reaction to point D was a potential spring of the original support line drawn from point V. However, the subsequent rally to point E, even though it was persistent, was not particularly strong. This past week’s poor performance, which caused the Wyckoff Wave to react past the halfway point of the previous rally, suggests the move to point E was not a Sign of Strength.
While this reaction can still be a test of the spring at point D, another support line may be in play. That is the support drawn from the original spring at point X.
The Wyckoff Wave has given us a few scenarios to consider.
1. It may successfully test point D and begin to rally for a more important Sign of Strength.
2. It may react past point D, test the support line drawn from point X and begin another rally within the trading range. This would mean we would not have any ending action and the sideways movement would continue.
3. The Wyckoff Wave will spring the support line drawn from point X. We would then see a rally and a secondary test. If the test was successful, we could be seeing the beginning of the next rally.
It appears the Wyckoff Wave may be getting ready to make a definite move, If so, I believe scenarios 1 and 3 have the highest probability of success.
The 100 Point & Figure Chart of the Wyckoff Wave gives us some fairly large counts as we measure along the 29,500 line. As we have no definite beginning point, the objectives are not at all absolute and cannot be calculated until we see a Last Point of Support.
However, they do make a rather bullish forecast and I suspect that many portfolios will increase nicely in value over the next 12 months.
What about a reaction scenario? While anything is possible, the behavior of the Wyckoff Wave over the past year has no signs of distribution. We have not seen a Buying Climax. We have not seen an upthrust. Most importantly, we have not seen sustained supply.
Finally, distribution is identified with wide spreads and relatively high volume, plus lower tops and lower bottoms. It also happens faster. 10 months is a very long time for a distribution trading range.
2013 should be a very good year. May it be a prosperous year for you and your investment portfolios.