This past week, the Wyckoff Wave reacted through the support line of its short term uptrend channel and moved back into the trading range. Once again, we must wait for ending action before the Wyckoff Wave can leave the trading range for good.
Last week, three possible scenarios were discussed. This week, two were eliminated. The Wyckoff Wave is not going to put in a Last Point of Support. Once it moved below point A, it was also not going to begin a new trading range phase. Resistance would have been at point B and supply in the area of the support line drawn from point D. Point D also formed the back edge of the creek.
The most interesting part of the reaction from point B is that it has been on a lack of demand, rather than strong supply.
On an up day, a lack of demand is usually found when the day’s market action is on narrower price spread and reduced volume. On a down day, wider price spread and reduced volume also suggest demand is being withdrawn.
Usually these conditions provide an opportunity for supply to come in and drive the stock or index lower on good price spread and strong volume.
Over the past few weeks, this simply hasn’t happened. When demand has been withdrawn, supply may appear briefly but then, it also dries up.
On the reaction from point B, even though we have seen wider spread and relatively strong volume, after a day or two supply dries up and demand returns.
Then the opposite happens. Demand is not sustained, supply returns and the Wyckoff Wave continues to react.
After reaching its high at point B, the Wyckoff Wave reacted for two days. The first day suggested a lack of demand. The second a lack of supply. This made the Wyckoff Wave vulnerable to rally. In addition, supply dried up right at the top of the trading range (near edge of the creek).
Sure enough, on the third day the Wyckoff Wave rallied. While price spread was wide, volume was slightly larger than the previous day.
This appeared to be the opportunity the Wyckoff Wave needed to rally past point B. However, a review of the intra-day waves showed that demand was already drying up. This was another opportunity for supply to come into the market.
The next day it did. The Wyckoff Wave reacted on good price spread and relatively good volume. It was now at the support line of the short term up trend channel. Here was another opportunity to continue the reaction and weaken the trend.
Once again supply dried up and last Friday the Wyckoff Wave rallied. However, the rally was on narrower price spread and decreased volume. Demand was again withdrawn.
This week the Wyckoff Wave opened with a sharp gap opening to the downside and then, rallied after a brief follow through to the downside. This intra-day showed that demand was still present.
On Tuesday, the Wyckoff Wave continued its attempt to rally, but ran out of demand and reacted. It was now at the support line of the short term up trend channel.
On Wednesday, the Wyckoff Wave reacted sharply and weakened the uptrend channel. This changed the short-term trend from up to neutral.
However, the day’s market action was on increased price spread and reduced volume. This was a lack of demand.
It is extremely important to understand that the market did not react on sustained supply, but simply because buyers were not particularly active.
On Thursday, the Wyckoff Wave reacted and found support at the bottom of an earlier phase of the trading range (line drawn from point Q). Then it rallied and is getting ready to test the top of the trading range and the support line of the recent short term up trend channel.
While the Wyckoff Wave rallied, once again demand was not present. This gives supply another chance to come into the market and drive the Wyckoff Wave back down towards the bottom of the trading range and test the August lows at point W.
While it is quite apparent that demand is not in control, neither is supply. While the relatively high volume on the reaction from point B, suggests the presence of supply, it is certainly not in control.
If, next week, the Wyckoff Wave reacts, it will be important to watch the quality of supply, especially as it approaches the bottom of the trading range.
If the Wyckoff Wave is going to react through the bottom of the trading range, the amount of supply will increase. If it is going to rally off the bottom or spring the range, the amount of supply will not increase.
Too often we forget about the relationship of price spread and volume and focus more on the Wyckoff indicators. That is because they can provide more specific information.
An overbought or oversold Technometer reading suggests a change in direction. The relationship between the Optimism – Pessimism Index (index of volume only) and the Wyckoff Wave or an individual stock helps us determine relative strength/weakness and potential turning points.
However, once these indications are presented to the Wyckoff student, they should always look to price spread and volume for confirmation.
Presently, the Wyckoff Wave is in an extended trading range. The range has several phases. When these phases are used on the 100 Point & Figure chart, there is a fairly large count that needs to be considered.
The longer-term market indicators continue to suggest this count will be to the upside. If that is the case, a great place to take new positions would be on the spring or its secondary test.
That’s why it’s important to pay close attention to how this trading range reaction develops.