The last couple of weeks have brought us some significant changes in the character of the stock market, as measured by the Wyckoff Wave.
The Wave has rallied strongly and reacted definitively. It has also done so in some unusual ways that don’t exactly fit many of the Wyckoff principles. What does that mean to the Wyckoff trader and how should we be looking at the market?
After failing to leave the trading range to the down side (point L), the Wyckoff Wave rallied and established resistance at point M and then reacted to establish support at point N. This new phase of the trading range was respected at both points O, P and then again at point Q.
The Wyckoff Wave then reacted to point R and then suddenly rallied strongly to point S. However, the reaction to point R was on good spread and volume and did not suggest supply was drying up. The Wyckoff Wave simply met support at the bottom of the original trading range (line drawn from point V) and rallied.
As there was little, if any drying up of supply, the strong rally to point S was not one of the most probable scenarios. Something wasn’t quite right.
Regardless, the Wyckoff Wave now had an opportunity to penetrate the resistance that was established at point A. The three scenarios were a creek jump, upthrust or simply a rally to start a new phase of the trading range.
This is where things got a bit complicated. It does not appear that the Wyckoff Wave did any of the above. Instead, even though it penetrated the top of the resistance, it simply reacted back into the trading range and quickly entered into an oversold condition relative to the Technometer.
Was the action around point S an upthrust? The definition of an upthrust is narrowing spread on increased volume, resulting in a poor close. While the spread decreased and the Wyckoff Wave experienced three days of relatively poor closes, the volume actually decreased. Rather than supply coming into the market, we simply saw demand being withdrawn. This allowed the Wave to simply react back into the trading range.
By definition, what we saw in the area of point S was not an upthrust.
Also, what we saw at point R, even though the reaction held above point P, was not a last point of support. The spread was too wide and the volume too high. Things were getting tricky.
On Wednesday (the day before point T) the Wyckoff Wave rallied and tried to reenter the short term uptrend channel. It failed. Instead, there was an intra-day failure to the upside and a poor close. This confirmed that the short term up trend channel, marked in blue, was broken. The short term trend became neutral.
While the price spread and volume increased, the relative volume was not great. This suggested strong supply did not come into the market.
More importantly, the Technometer quickly moved into an oversold condition. In addition, the Optimism – Pessimism Index moved quickly into a positive divergence with the Wyckoff Wave. The same thing happened with the Force Index.
For this to happen so high in the trading range suggested we were not looking at a prolonged down move. It also negated any remaining doubts that S was an upthrust.
Thursday and Friday produced those unwanted and unhelpful gap openings. Thursday’s was down. Friday’s was up. Both confused the supply and demand relationship for those days.
It is important to understand that gap openings do not count in the price spread. Only the day’ s high price and low price, created at or after the opening, apply when analyzing price spread and volume.
Therefore, Thursday’s Wyckoff Wave resulted in reduced price spread and increased volume. This suggested the presence of demand, not the continuation of supply.
This concept was validated on Friday when the Wyckoff Wave traded higher on slightly decreased volume. However, despite the strong gap opening to the upside, the Wyckoff Wave actually put in a poor performance. We saw both reduced spread and volume. This would suggest a lack of demand.
This action suggests we will be testing point S and there is a reasonable chance this test will succeed. This would cause the Wyckoff Wave to react back into the trading range.
The one fly in the ointment is the Technometer. As the Wyckoff Wave again approaches the resistance, the Technometer remains in an oversold condition. In addition, it will open on Monday in an extremely oversold condition. This suggests the test of the highs at point S will either fail or be a poor quality.
Regardless, it still appears that a fair amount of supply is still present and strong demand is not yet ready to come into the market. The actions at both point R and S suggest to me that the Wyckoff Wave is not yet ready to leave the trading range to the upside beginning a new leg of the bull market.
I have drawn a new support line, in orange, labeled L – P. I am not changing the trend, but simply drawing in the support line to see if it comes into play. I probably would not have drawn this line if we did not see support coming in at point R.
It just may be that the support line could point the way to a more important area of support. We’ll just have to wait and see what the market tells us.