Let’s pick up our study of the Wyckoff Wave at point M. Click here to view and download the related chart – Wyckoff Wave-markeup phase.
Here we have a wonderful Last Point of Support. Even better, it lasted about five days, giving the Wyckoff student plenty of time to find and take positions in stocks that were ready to move. And move they did. For a little over two months, the Wyckoff Wave advance strongly to the upside, topping out at just under 27,000. That’s a 17% move of just over 4000 points in two months.
Let’s look at the move from point M to point S and see what the Wave tells us and what lessons can be learned. On September 1, 2010 the wave “left the station” and began its rally. However, it looked like it was going to immediately run into trouble. As it approached the top of the trading range, the spread shortened and the volume decreased. To make matters worse, the Technometer became overbought. The Force Index was rallying nicely, but was still in negative territory. The Optimism – Pessimism Index was in harmony with the Wave and there were no negative Inharmonious Actions or Divergences. Was the Wyckoff Wave going to run into resistance at the top of the old trading range and continue its sideways movement? Honestly, at that time, I simply didn’t know. Therefore, I moved up my stop orders to protect my profits and waited to see what would happen. There’s no sense for intermediate traders to close positions until we see a definite change in the trend. None was present. The same goes for short-term traders. The best thing to do here is to crowd your stops and let the market tell you its future direction.
The Wave reached point N and, instead of reacting, moved sideways for a few days and then continued the rally. It moved closer to the supply line of the long-term uptrend and then began to move sideways to point G. This time the Technometer was not overbought but sitting happily in a neutral condition. The Optimism – Pessimism Index was moving in harmony with the Wave. The Force Index was relatively strong although still in negative territory. There was a negative divergence with the Wave, but as the Optimism – Pessimism Index was in harmony with the Wave and the Technometer was neutral, this wasn’t a significant event.
The Wyckoff Wave sprung this minor area of re-accumulation at point P. This is known as a spring in and uptrend. It had a strong one-day rally and began to run into some resistance as it reached the supply line of the long-term uptrend. Isn’t it wonderful how these trend channels can be wonderful guides for Wyckoff traders.
The Wave moved into an overbought position, relative to the long-term supply line at point Q. A few days earlier the Wyckoff Wave had also become overbought, relative to the Technometer, and, for the first time we should begin to look for a normal corrective reaction in and uptrend. Let’s examine the Trend Barometer. The Optimism – Pessimism Index is still in harmony with the Wave. The Technometer, while close to being in an overbought condition, is still neutral. The Force Index is still reasonably strong. Again, we should have moved our stops. Short-term traders should probably close their positions as the Wave reached point Q and look for new opportunities on the reaction. The intermediate trader should probably place them just below the halfway point between M and Q. Isn’t it interesting that this is also at the resistance of the old trading range. A normal corrective reaction would be a major backup to the Creek. Isn’t it amazing how everything just seems to fall right into place.
However, the Wyckoff Wave wasn’t going to do that. It was on a mission and the mission was not ending here and the Wave was not going to make it easy for people to enter the market. Let’s look at the reaction from Q to R. The Wave had run into supply exactly where it was expected. Two days after the high at G there was a strong down day, followed by a week up day. There was a gap opening to the down side and the Wyckoff wave closed in the middle of a wider spread and high-volume at point R. Was this a corrective reaction? Let’s look at the Trend Barometer and compare point R with point P.
On the vertical line chart point R is holding above point P. However, the O – P Index is slightly lower. This is the first time the Optimism – Pessimism Index has not been in total harmony with the Wyckoff Wave. While not yet in an oversold condition, the Technometer is very close and will become oversold if the market continues to react. There is a significant positive divergence between the Force Index and the Wyckoff Wave. This does not signal a turning point. While we have the advantage of being a Monday morning quarterback and looking at this action after the fact, traders saw heavy supply and a strong break to the down side at point R. The Trend Barometer is beginning to signal the reaction may be a normal corrective reaction in an uptrend. However, these are only indications and not definite turning points. Until we see otherwise, we need to assume the trend is still up.
While some aggressive short-term traders may have taken a short positions at point Q, it might have been more prudent to wait until we could define a short term downtrend.
The Wyckoff Wave then reacted to point R. It is interesting to note that the reaction was stopped by the resistance line formed by the very minor re-accumulation of O and P. The Wave then rallied briefly and then reacted to point S. This in itself shows the Wyckoff Wave’s strength as the reaction only lasted four days. Short-term traders can now draw a short-term upward trend channel with the support line between R and S and the supply line at the top of the rally. The Wave continued to rally and moved into an overbought position, relative to the long-term up channel at point T.
Even though the Technometer is in a neutral condition, the oversold position strongly suggests that short-term traders either close out their positions or crowd their stop orders.
The Wyckoff Wave then reacted to point U, where it saw some minor climactic action. It then moved sideways and sprung this minor trading range at point U. The low volume suggests this is a number 3 spring. A number three spring does not need to be tested and the Wave rallied smartly back to point W. This is also where we can expect to see some resistance as the Wave is testing the previous high at point T.
A quick comment on the short term down trend channel. I believe short-term traders should insert these as soon as it is logically feasible. After all, their trades are only for a period of days or a couple of weeks. Therefore, I drew the supply line of the short term down channel at the top of the first attempt to rally. A parallel support line was drawn at the bottom of the first reaction. I did not mark these on my chart, but if you examine the chart closely you can see my rationale. Notice that after point U the Wave rallied and weakened the short term down channel. On the next reaction it broke the short term downtrend. If they were not already, any short-term positions to the down side should be closed. Without this downtrend channel, the signal to close trades might have been missed and profits reduced. I think it is extremely helpful to pay very close attention to trend channels.
While the Wave is not in an overbought condition, relative to the Technometer, it was dramatically overbought a few days earlier. However, look at the spread and volume the day after the overbought condition appeared on the Technometer. We had dramatically reduced spread and volume. This strongly suggests a lack of supply, but this is right where supply should’ve come into the market. It didn’t and the Technometer moved quickly to an oversold condition. This little clue should have helped us to maintain our positions. Then, the Wyckoff Wave eased through the resistance and continued to rally. And rally it did, all the way to point Y. At this point the Wyckoff Wave was significantly oversold relative to the long-term uptrend. We had also seen the Technometer move into a very oversold condition. However, the force index moved into positive territory which mitigates the Technometer a bit.
One final thought on the Optimism – Pessimism index. Notice how lead the Wyckoff Wave throughout the uptrend. Mr. Robert Evans often referred to this as an important indicator and as long as the O – P is leading the way we were in good hands.
However, short-term traders should have been looking to close positions and intermediate and long-term trader’s should move there stop orders at least to the area of the halfway point between points capital M and Y. That is also right at the support line of the long term downtrend.
Isn’t it interesting how things all seem to come together.
In our next blog post, we will bring the Wyckoff wave up-to-date and then continue with smaller posts as we comment on its future action.
As you can see, we rely heavily on both the Trend Barometer and trend channels to make these observations. The trend barometer is only available with our Pulse of the Market Charting Service. If these observations interest you and you would like to have a 15 day free trial of the charting service, just go to http://www.wyckoffstockmarketinstitute.com/chart.htm for more information and to sign up.