On Friday, the Wyckoff Wave made its strongest move to the downside in over 2 1/2 years. What looked like a normal corrective reaction that would test the supply line of the short-term uptrend channel, turned in to a strong reaction that, not only drove through the support line, but moved substantially below the halfway point of the rally from point I (point H on the weekly chart).
When something like this happens, the headlines tell the world that the market is collapsing. It is easy for those, who look at the market from a very short term perspective, to become overly nervous and wonder what is really happening.
This is logical as Friday was not a very good day for bullish investors.
Often times, when events like this happen, it is best to step back and look at the market from a broader perspective. One excellent way to do that is to use the weekly chart of the Wyckoff Wave.
For many, many years and certainly from the bottom of the 2008 bear market, the Wyckoff Wave has been the most sensitive of all the market indexes. The long-term trend channel, as drawn on the weekly chart, has been in effect since the bottom of the bear market. The few times the Wyckoff Wave has been either overbought or oversold, relative to that up trend channel, has simply given Wyckoff traders the opportunity to take positions that have produced strong profits.
Since early 2009, the Wyckoff Wave has undergone for periods of re-accumulation. Each has resulted in a substantial rally and rewarded those investors who have adhered to Wyckoff strategies and techniques.
The markings on the attached weekly chart are not new. They were drawn as they happened and have been left on the chart as the market advanced.
Let’s take a closer look at the last re-accumulation period on the weekly chart. It began in May, 2013 at point K (point J on the daily chart). The Wyckoff Wave moved into a slightly overbought position, relative to its up trend channel. It then reacted and found support at point L. The Wave then moved sideways and found resistance at point M and then support at point N. As point N was not below the support line, drawn in blue, this was not a spring and it was expected the Wyckoff Wave would continue to move sideways until it saw ending action.
That’s what happened, except it did not play out in the traditional manner. Instead, the Wyckoff Wave attempted to leave the trading range to the upside and failed. It became quickly apparent this was not an upthrust, but simply a slightly higher resistance point than point M.
Instead, the Wyckoff Wave reacted to point P on reduced price spread and volume. It then rallied through the top of the trading range to point Q.
This made the rally from point N to point O a Sign of Strength and the reaction to point P a Last Point of Support.
The rally to point Q appeared to be a Creek jump. This is where things got a bit difficult. It was expected the Wyckoff Wave would react back to the Creek (resistance/support line) on reduced price spread and volume. While the Wave reacted on reduced price spread, volume was relatively high. However, the Wyckoff Wave did hold above the Creek at point R.
It then continued to rally up to point S. However, despite the overall relative strength, the rally was of relatively poor quality. The Wyckoff Wave was also in an overbought position relative to its up trend channel. At some point, overbought positions need to be corrected. On Friday, the Wyckoff Wave corrected that position.
This put the Wyckoff Wave back into its long-term up trend channel and gives it a chance for a second, and more traditional, backup to the Creek.
It should also be noted that the halfway point of the rally from points N to S is right at the Creek (the resistance, now support line drawn from point K through points M and O).
Does this mean the Wyckoff Wave will begin to produce narrow price spread and reduced volume as it approaches the Creek? Is this going to be an important Last Point of Support (LPS)?
Right now, there is no answer. We could see a LPS. Or, the Wyckoff Wave could simply continue to react and return to the trading range.
The clues that will help answer these questions will probably appear first on the daily chart and the 100 Point & Figure chart.
As the Wyckoff Wave approaches the Creek (the resistance, now support line drawn from point J through points U, W and A) on the daily chart, it will be important to watch both the price printed volume and the Wyckoff tools.
The position of the Optimism – Pessimism Index in relation to the Wyckoff Wave, the behavior of the Technometer and the relationship between the Force Index and the Technometer will be extremely important in answering those questions.
Yesterday, Pulse of the Market subscribers received a fairly detailed analysis on Friday’s market action and how it may impact the future direction of the market.
It is at times like these when the Wyckoff tools become extremely important in helping investors time market turns and make trading decisions.
The good news is that the long-term trend of the market is up and despite Friday’s one day collapse, the long-term future looks extremely promising.