A week ago, Wyckoff Wave was happily reacting back towards the top of its most recent trading range. The top is defined by a resistance, now support line running from point J through points U and A.
The Optimism – Pessimism Index was in harmony with the Wyckoff Wave. The Technometer was in a neutral condition and the Force Index was reacting. The previous rally to point H was unable to take out the highs at points F and D. The price spread and volume showed some supply coming into the market, but there was plenty of room for it to dry up before reaching the top of the trading range.
The short-term downtrend channel, shown in red on the daily chart, had been established and the Wyckoff Wave was testing its support line as it reacted to point I.
Finally, at the time, a count along the 100 Point & Figure chart give us an objective of 38,100. This was just above the resistance/support line described above.
Everything was pointing to a positive reaction towards an important Last Point of Support. This successful backup to the Creek would be the catalyst for a new mark up phase and give the Wyckoff Wave an opportunity to reach its long-term objectives to the upside.
As the Wyckoff Wave reached point I some demand was expected to come into the market. This is normal when a stock reaches a support line.
The subsequent rally was not of good quality and appeared to run out of steam as it approached the short-term downtrend channel’s supply line. It was logical to assume that the Wyckoff Wave would run into resistance at the supply line and continue its reaction back towards the top of the trading range.
The only problem with that scenario was the Technometer’s oversold condition. At a time when it should have been overbought, the Technometer was registering 38.57. This solidly oversold condition was an indication that a reaction might not happen, or it would be short and shallow.
Despite the oversold Technometer, this past Tuesday, the Wyckoff Wave was unable to rally through the supply line and experienced an intra-day failure to the upside. The Technometer reading of 39.87 indicated a move toward a neutral condition.
The Wave opened to the downside on Wednesday. Then, along came the Fed. At about 1:15 PM the Wyckoff Wave began to rally. Fifteen minutes later the Federal Reserve announced that due to an improving economy it will begin to reduce its economic stimulus program.
Even though earlier conventional wisdom indicated this would have a negative impact on the markets, the Wyckoff Wave and the other market indices rallied strongly. This lasted for 55 min. After that, the Wyckoff Wave continued to move to the upside, but the rally was of poor quality.
As it reached the supply line of its intermediate up trend channel (drawn in blue), more supply came into the market. Friday’s market action was on decreased price spread, increased volume and a poor close. As this happened while the Wyckoff Wave was trying to move into new high ground, there is a high probability the Wave will react back down towards its short-term down trend channel.
At point I, it appeared that, after a small rally, the Wyckoff Wave would continue to react. It didn’t. While the Federal Reserve’s announcement certainly moved the market higher, news simply takes the market where it was going to go, just faster.
This means that supply was not drying up and before the Wyckoff Wave could advance it needed to take in more overhanging supply.
That was confirmed by the narrow spread and high volume seen this past Thursday and Friday. It is even more obvious when examining the Optimism – Pessimism Index.
The Wyckoff Wave has gained almost 1,500 points since the low at point I. Yet the O – P Index is 52 points lower than it was at point I. Even though the Wyckoff Wave was rallying, a great deal of supply was being dumped on the market. Until the supply has been taken in, it will be difficult for the Wyckoff Wave to substantially rally.
This has placed the Optimism – Pessimism Index in a negative divergence with the Wyckoff Wave when compared with points capital H, F and D.
However, there is one caveat. If the Wyckoff Wave begins to react, it will immediately moved into a positive divergence with the Optimism – Pessimism Index when compared with points I, G, E and C. In addition, the Technometer will quickly move into an oversold condition.
In addition, the Wyckoff Wave has moved into an overbought position relative to its long-term up trend channel. This, in itself, suggests a brief reaction might be on the horizon.
These conflicting indicators add another possible scenario to market analysis. That is absorption. Is the Wyckoff Wave strong enough that it will take in all the overhanging supply and move into new high ground, at the same time?
Whether the Wyckoff Wave rallies through the supply or reacts and dries up, the result will be the same. That should make 2014 promising and profitable for bullish investors and traders.
Due to the holiday season, there will be no market letter next week.
From my family to yours, the very best wishes for a wonderful holiday season and a happy and prosperous 2040.