Where Do We Go From Here?

Click Here For Wyckoff Wave Chart 02-10-12

This week the stock market, as measured by the Wyckoff Wave, accomplished very little. Until last Friday it had moved sideways in a narrow trading range. Then on Friday (marked by a red arrow), the Wyckoff Wave dipped below the long-term resistance line drawn from the tops of last Spring’s highs at point G. However, due to the significant gap opening to the down side, the price spread was slightly reduced. In addition, the volume was less than the previous day. This suggests a lack of supply. This market action did not produce the strong supply that normally would be expected to come into the market as it began to react.

What has happened over the past couple of weeks and where can we expect the market to go in next week and weeks to come?

I don’t know about you, but this has been a difficult couple of weeks in attempting to analyze and establish what the market is doing and where it is going.

Things seemed fairly normal at point U, when the Wyckoff Wave up thrusted the above-mentioned long-term resistance line. The Wyckoff Wave then reacted poorly and two days after the up thrust encountered demand as it reached the P – R support line of the short term uptrend channel. I have marked this point as V on the chart.

The following day the Wyckoff Wave continued its attempt to rally. However, it quickly ran into supply and reacted. This reaction weakened the P – R support line. This failed rally would lead one to conclude that the Wyckoff Wave would continue to react down towards a significant resistance area. This area includes the support line H – P, the resistance line drawn through point K and, quite significantly the long-term supply line drawn through points G & S. This is significant because once the supply line is confirmed to be broken, the long-term trend of the Wyckoff Wave will be changed.

Short term traders who had taken short positions on the up thrust were delighted. This was also good news for intermediate and longer term traders to the upside, who were looking for an important Last Point of Support and a confirmed breaking of the long-term supply line mentioned above.

Unfortunately, there was an OOPS. As often happens, the Wyckoff Wave ignored what it was expected to do and instead rallied to point W. However, an examination of the rally does not offer a very bullish scenario. The first day (two days after point V) saw demand coming in during the day but, at the end of the day supply appeared, resulting in a poor close. The next day, decreased volume along with a narrowing price spread suggested a lack of supply and perhaps the Wyckoff Wave could continue to rally.

On the final day of the rally to point W, the Wyckoff Wave rallied, but on decreased price spread and increased volume. Supply came right back into the market.

Although up thrusts do not need to be tested, was this a poor quality test of the up thrust at point U? Based on the poor rally to point W, the bears could come to that conclusion and feel more sanguine about their positions. However, as mentioned last week, if any of those short positions had also rallied above the up thrust levels, good trading discipline dictated they needed to be closed.

So now, was the Wyckoff Wave ready to react? It was not and apparently not ready to stop messing with our minds. The day following point W was a reaction on reduced price spread and reduced volume. Again, this suggested a lack of supply, giving the Wyckoff Wave another chance to rally. This takes us to point X. Here the Wyckoff Wave tried to rally briefly in the morning and then reacted. The reaction again weakened the short term support line and by two o’clock in the afternoon all the bears were celebrating. Then, demand came in and the Wyckoff Wave closed higher on sustained volume. Were we experiencing another OOPS?

Again, the Wyckoff Wave was unable to follow-through and on the following day it experienced an intra-day reaction. However, once again demand came in late in the day and the Wyckoff Wave only closed slightly lower than the close at point X. It did, for the first time stay completely below the short term support line. The strong demand at the end of the day as shown by the increased volume, once again put the Wyckoff Wave in a position to rally.

The potential rally did not happen. Once again, the Wyckoff Wave experienced supply. It reacted and closed near the bottom of a slightly narrower price spread. However, and there have been a lot of howevers, the price spread and volume still suggested some demand was present.

It is important to note that every time the Wyckoff Wave reached the general area of 31,400 supply came in. It is also important to note that since point K, the Wyckoff Wave has left the short term up trend channel to the down side and has been unable to return. This is an important weakening of the short term uptrend channel.

This brings us to Friday’s market action. There was a substantial gap opening to the down side. The gap opening and the subsequent market action caused the Wyckoff Wave to break through the long-term resistance line for the first time since point V.

Once again, the bears were enthusiastic. However, after the gap opening, there was limited follow-through and supply and demand fought throughout the day. Demand landed the last punch as the Wyckoff Wave closed near the day’s opening price. The reduced price spread and volume suggest that Friday’s market action resulted in a lack of supply. This makes the Wyckoff Wave vulnerable to at least an attempted rally on Monday.

So here we are. 11 days of sideways movement on relatively narrow price spread. Supply has consistently come in at the 31,400 level and, until Friday, demand has appeared at the 31,200 level.

Some would say we are experiencing absorption. Usually absorption produces wider price spreads as the market takes in the available supply. While this scenario is always possible, the last 11 days have not really felt like adsorption.

It is important to remember that at point U the Wyckoff Wave reached its highest level following the 2008 bear market. As evidenced by the recent market action, there is still good supply ready to be dropped back into the market. As I mentioned a couple of weeks ago, the supply not only comes from investors who saw huge profits disappear in the 2008 market reaction, but also from investors who were bullish through last spring and experienced last summer’s reaction and the subsequent trading range. They are hoping to exit at least even or with a small profit. I would suggest the market is moving rapidly into stronger hands, but the process is not yet complete.

If Friday’s market action is the beginning of a reaction down to test those important resistance points, let’s look at the 100 Point & Figure chart of the Wyckoff Wave. It is the second page of the attached Adobe Acrobat PDF file.

There is a count of 14 on the 31,400 level. This gives us an objective of between 31,000 and 130,000 on the Wyckoff Wave. If the Wyckoff Wave reacts and reaches the support line H–P, it will most probably be right in the objective area.

Even though demand has not left the market, in my opinion, the odds favor the Wyckoff Wave reacting. Even with Friday’s reaction, the Technometer is still in an overbought condition.

If it does this on reduced spread and volume and dries up the remaining supply, the intermediate and long-term trend of the Wyckoff Wave will change to up and the long-term up trend channel that I have drawn through point H & P, with a parallel supply line drawn through point K, will become the dominant channel in, what should be, an exciting bull market.