The stock market, as measured by the Wyckoff Wave, finished the week exactly where it opened last Monday. Despite that apparent inactivity, there were some important changes in the market, along with some interesting signals.
On Wednesday, at point J, the Wyckoff Wave apparently reached the end of its rally from point G. While the rally was not of the highest quality, it nicely exceeded the halfway point of the previous reaction. This made a bullish statement that should be filed away for future use.
It is also important to notice that point J did not reach the supply line of the short term up trend channel. This suggests there is a high probability that the short term up trend channel will be broken and we will be looking for a new short-term channel to the downside.
It also appears that the Technometer, after going through some wide fluctuations is beginning to settle down. It was last in an oversold condition at point I and has remained neutral since then.
The Technometer did remind us of an important Wyckoff principal is and rallied to point H. Just before reaching point H, the Wyckoff Wave went into an extremely dangerous overbought condition. This suggested a sharp reaction was imminent. That never happened. The reaction to point I was short and not particularly deep.
That is why it is important to always compare the Force Index with the Technometer. The Force Index, which usually is a negative, was producing positive numbers. When the Technometer is overbought, but the Force Index is producing high positive numbers, the resulting reaction is usually short lived and not particularly deep. That’s exactly what happened. This important Wyckoff strategy should be filed away for future reference.
At Friday’s close, the Wyckoff Wave had already weakened its short-term uptrend channel and was sitting right at the support/resistance line drawn from point W. It appears the market is ready to react, but what for how long and how far?
The Wyckoff Wave will probably develop one of these four scenarios.
The point G was a Spring scenario.
If we assume that point G sprung the support line drawn from point F (which also appears on the weekly chart) than the rally to point H could have been the rally off the spring. The reaction to point I could have been the secondary test.
Then it is reasonable to conclude that the rally to point J was a Sign of Strength and we are reacting to a potential Last Point of Support
However, since the reaction to point I was so shallow, it is possible we have not seen the secondary test. Instead, the move to point J was simply the reaction to the spring.
If the Wyckoff Wave continues to react, it will be important to see how it behaves as it approaches the halfway point of the rally from points G to J. If the reaction stops above the halfway point, we probably have a Last Point of Support.
If the Wave moves past the halfway point, the scenario is still in place. We just would be looking for a successful Secondary Test of the spring at point G.
The Spring hasn’t happened yet scenario.
This scenario suggests the bottom of the trading range is the support line drawn from point L. If that is the case, the rally from point G was merely a rally within the trading range.
If the Wyckoff Wave reacts and penetrates the low at point G, there is a fairly good chance it will penetrate the support at the bottom of the trading range. That is where we could see ending action in the form of a major spring.
A spring at this location would shakeout the entire trading range that began last March at point A. If this happened and we saw a successful Secondary Test, Sign of Strength and S Point of Support, the market will be ready for a substantial advance.
Point F was a Last Point of Supply
This bearish scenario suggests that the area from point X to point D was distribution. That would make the move from point D to point E a fall through the ice. Point F is a Last Point of Support. A count, on the 100 Point & Figure Chart, along the 31,900 level produced objectives of between 29,300 and 28,100.
If the Wyckoff Wave reaches the higher objective, it would penetrate the support line drawn from point L. This move would tie into the “Spring hasn’t happened yet” scenario.
If the Wyckoff Wave is able to achieve its maximum objective, it would reach the resistance/support level of the August – October trading range.
We are simply rallying and reacting within the trading range with no ending action.
There is always the possibility that the Wyckoff Wave is establishing a new phase of the trading range that has lasted for most of 2012. We will simply see rallies and reactions until there is ending action, most probably in the form of a spring or an upthrust.
I am partial to the “the Spring hasn’t happened yet” scenario.
The trading range has always had an accumulation “feel”. This is especially true of the long slow reactions from points S to W and even from point X to point A. The wider price spreads, that normally signal distribution, have not been particularly dominant.
The rally from point G was not of a strong quality. This reduces the probability that it was a sign of strength. However, the fact that it exceeded the halfway point of the previous reaction is significant.
The Wyckoff Wave has taken in a tremendous amount of supply since the rally to point S. If we were seeing distribution, supply would overcome demand and the Wyckoff Wave should be substantially lower than it is now.
It is also interesting that one of the 100 Point & Figure Chart objectives is right where the spring, described in the scenario, would take place.
Important and significant news will be made over the next couple of weeks. While Wyckoff students believe that news does not drive the market, but simply gets there faster, it will probably play an important role in short term market direction.
Will bull markets spring the trading range just when doom and gloom seems to be on the horizon? Stay tuned and find out.