When A Backup Isn’t A Backup

Click Here For Wyckoff Wave Chart 03-14-2014

Unfortunately trading in the stock market does not offer easy mechanical solutions to the market’s future direction. If that was so, everyone would be a multimillionaire and no one would lose all or a portion of their capital.

It is helpful to remember that almost every time someone makes a dollar trading the market, someone else loses that same dollar.

Therefore, it is not unusual for developing scenarios to suddenly change course and arrive at unexpected results. That’s what happened, from a short-term perspective, this past week. That’s why it is important to always consider alternative scenarios.

Recently, the Wyckoff Wave had established a short-term trading range. The resistance line was marked by point U. The support line by point B.

Last week the Wyckoff Wave appeared to move through the resistance (jumped the Creek) as it rallied to point W. This was a possible Sign of Strength (SOS). If the Wyckoff Wave was going to continue to rally, it first needed to back up to the resistance (Creek) and put in a Last Point of Support (LPS).

If the Wyckoff Wave reacted back to the resistance on reduced price printed volume, it would certainly increase the probability of a successful backup and a Last Point of Support. This was the primary scenario.

On Monday and Tuesday the Wyckoff Wave did react on reduced price spread and volume. On Wednesday the reaction continued back to the resistance and, as expected, some demand came into the market. The Wyckoff Wave then rallied and closed near the top of a wider price spread. This was an intra-day failure to the downside and suggested there was a lack of supply. Was this the long-awaited Last Point of Support?

While the scenario’s success probability was good, it would only be confirmed if the Wyckoff Wave rallied past point W into new high ground.

That rally began on Thursday, but before it got very far good supply returned and drove the Wyckoff Wave back through the resistance and into the short-term trading range. The SOS and LPS were eliminated and the Wyckoff Wave now needed to experience new pending action. This eliminated the primary scenario.

Wyckoff traders and investors know that after a Sign of Strength through the top of a trading range, three things can happen.

1. The stock can react back to the resistance on reduced price printed volume and put in a  Last Point of Support.
2. The stock can react back into the trading range.
3. The stock can move sideways in a new trading range.

All three of these scenarios must be kept in mind until one of them is confirmed. Short-term traders, who took new positions on the apparent LPS, needed to quickly execute there stop orders as the rally did not materialize.

Longer-term investors needed to look at this short-term event from an intermediate or long term perspective. That would take us back to the trading range that began last May at point K.

The Wyckoff Wave moved sideways for five months before leaving the trading range to the upside, as it rallied to point S. It then reacted back to point capital T, but the rally was on relatively increased price spread and volume. While he did meet support at the top of the trading range, the reaction did not fit the criteria of a backup to the Creek for a Last Point of Support.

When this happens a stock or index would usually make a second attempt as supply needs to be tried up before a substantial rally can begin. This is probably what is happening now. The second attempt will either be successful and a new markup phase will begin, or the Wyckoff Wave will either fall back into that whole trading range or continue its sideways movement waiting for ending action.

Several of the Wyckoff indicators suggest, despite the international news, the market may be ready to rally. The Wyckoff Wave’s Technometer is in an oversold condition. In addition, it is moving into a more oversold condition than it was at point N, but the Wyckoff Wave is presently at a much higher level. This is a positive indicator.

Because of this, intermediate and long term investors should be looking for new positions on reactions. Therefore, despite this week’s sharp decline in potentially bad news, intermediate and long-term investors should continue to look for new opportunities.