Wyckoff Discipline And Looking For Supply

Click Here For Wyckoff Wave Chart 10-17-2014

On Friday the stock market, as measured by the Wyckoff Wave, completed a wild and wacky week. Despite all the negativity surrounding the week’s market action, the Wyckoff Wave actually closed 229 points higher than the previous Friday.

As Friday’s closing price was 40,098, the price differential was not particularly large, but it was higher.

This completed a rather strong reaction that started at point B. But it really got everyone’s attention as it moved down from point D.

Many felt the market would experience an important move to the downside. The 200 or so swings on the Dow Jones Industrial Average helped fuel the gloom and doom scenarios.

However, strong down moves happen quickly and good supply must not only be present, but be sustained. A review of the intra-day waves showed that while some supply was present, it was not particularly overwhelming and certainly was not sustained.

A down market is much more orderly than an up market. That is because the professionals dominate strong reactions and bear markets. They count on average investors panicking and selling stocks in anticipation of a market crash. This is how supply comes into the market. That wasn’t really happening.

Because of the amount of supply coming into the market during the beginning of a strong down move, it reacts quickly. There are few, if any rallies that would allow investors an easy exit. During the reaction from point B, the market had a strong up day and there was little follow through on weak down days.

The Optimism – Pessimism Index is an extremely helpful tool in analyzing the impact of supply and demand on the market or an individual stock.

The O – P Index is simply an index of volume. As the Wyckoff Wave or an individual stock moves up and down during each trading day, the amount of up volume is added to the O – P Index. Conversely, the down volume is subtracted.

When compared to the Wyckoff Wave, it helps us analyze effort versus results. The O – P Index represents effort. It measures how hard the index is trying to advance on rallies or decline on reactions.

The Wyckoff Wave shows the result of these efforts.

As the Wyckoff Wave reacted to point E, it moved below the previous low at point W. However, the O – P Index remained higher. This would strongly suggest that the effort to the downside did not match the results.

When this happens, it is called a positive divergence and is a bullish indication. Positive divergences not normally appear at the beginning of a strong move to the downside.

This helps confirm the intra-day analysis that supply was relatively moderate and not sustained.

While all that sounds logical in hindsight, it is a different story as the market reacts and emotions begin to take control. That’s why market discipline is so important to a trader’s success.

I’m an old-school Wyckoff investor. I use the Wyckoff strategies and techniques exclusively to make decisions in the stock market. Over the years I have learned to trust them and developed a discipline to stay with them, even during difficult times.

Am I right all the time? Absolutely not. But by analyzing market data using the Wyckoff strategies, techniques and tools and having the discipline to stay the course, I can stay ahead of the game.

One important factor in analyzing springs is that the level of supply, in the days leading up to the spring, remains relatively moderate and does not increase. This appeared to happen on the reaction from point D.

It also appears that on Wednesday, the Wyckoff Wave experienced a major shakeout or #1 spring. This was the move down to point E on the daily chart. This was followed by the rally off the low on Thursday and Friday, which completed the shakeout.

While this has, at least temporarily, removed the Sign of Weakness scenario that would mark the beginning of a major down trend, there is some more work to do before the shakeout can be confirmed.

All shakeout or #1 springs must be tested. This means that after completing its response to the spring at point E, the Wyckoff Wave should react and test the shakeout.

If the reaction holds nicely above point E and is on relatively reduced price spread and volume, the test will be successful and the Wyckoff Wave will be in a position to continue its response off the spring.

That response could well be a strong move to the upside which does not need to penetrate the top of the trading range before reacting. That move is a potential Sign of Strength and the reaction would be an important Last Point of Support.

If the Wyckoff Wave does not move into new high ground during this potential Sign of Strength, it would do so off the Last Point of Support.

One last caveat remains. Wyckoff guru Robert Evans always cautioned Wyckoff students to beware of springs in a down trend.

The Wyckoff Wave is presently in a short term down trend channel. It is drawn in red on the daily chart.

Even if the secondary test is successfully completed and the Wyckoff Wave rallies, it is doubtful that action will break the downtrend channel. It appears that that will only happen on a successful Last Point of Support.

This wild and wacky week demonstrated that the Wyckoff strategies, that were developed almost 100 years ago, continue to work beautifully in today’s ever-changing markets.