The government shutdown and especially the raising of the debt ceiling has the stock market on pins and needles. I would suspect that before things settle down we will see a fair amount of volatility in the market. However, this will probably impact short-term traders more than intermediate and long-term investors.
Since late May the stock market, as measured by the Wyckoff Wave, and other important indexes, has moved sideways. For the most part, that’s sideways movement has kept the Wyckoff Wave in its long term up trend channel.
When a sideways movement lasts this long, it is reasonable to conclude that the market is experiencing a trading range. That trading range may be re-accumulation or it could be distribution. While there are certain indicators that provide clues as the trading range develops, that question is rarely answered until there is ending action.
In most cases ending action comes in the form of a spring or an up thrust. This is a significant indication that the trading range phase is over and the market is going to begin an important move. The move could be up, or it could be down.
The Ending action is confirmed if it is followed by a Sign of Strength and a Last Point of Support, or a Sign of Weakness and a Last Point of Supply. While the Wyckoff Wave for individual stocks can experience Signs of Strength or Weakness without a spring or an up thrust, these important Wyckoff Wave indications provide wonderful clues as to the market’s future direction.
With all the noise surrounding the news and speculation regarding the future direction of the market, let’s step back and take a longer-term view.
In May, when the Wyckoff Wave rallied to point K on the weekly chart, it moved into an overbought position relative to its long-term up trend channel. Overbought and oversold positions need to be corrected. That is exactly what the Wyckoff Wave did as it reacted to point L.
What is important here is that there was no Buying Climax at point K. There was just a normal corrective rally back to point L.
However, the action at point L was climactic in nature. While it is not shown on the weekly chart, there was an automatic rally and a secondary test. That is shown on the daily chart at points R and S.
The Wyckoff Wave then rallied to test the highs at point K and the test was successful. This created a resistance line and became the first point at the top of the trading range.
The Wyckoff Wave then reacted back down to the support line drawn from point L and successfully tested it.
Despite a successful test, there was no ending action, which was a bit of a disappointment to the bulls who were ready to see the market rally.
The Wyckoff Wave did rally and pushed through the high at point M. What was happening here? It certainly looked like is an important Sign of Strength that could be the impetus to a sustained rally.
However, two days later the Wyckoff Wave was back in the trading range. The Sign of Strength had failed. Some even thought we were seeing an upthrust. However, as discussed in previous posts, the penetration of the resistance simply didn’t meet the definition of an up thrust. The Wyckoff Wave then reacted back down into the trading range.
On the daily chart, the Wave reacted back past the halfway point of the previous rally from point Z to point A. It appeared to be happily on its way towards the bottom of the trading range and possible ending action, in the form of a spring.
However, as it attempted to return to the short-term downtrend channel (marked in red) it saw support and rallied back towards the top of the trading range.
However, there has been no ending action. It is difficult to conclude that we can see a significant move without first seeing ending action.
Perhaps the Wyckoff Wave will continue to rally and up thrust the trading range. This could signify a significant move to the downside. However, after Thursday’s strong rally, there was little follow through. In addition, the O – E Index is in an intermediate term negative divergence with the Wyckoff Wave, when compared with point U on the daily chart.
Right now the Wyckoff Wave is a long ways away from the bottom of the trading range and any ending action in the form of a spring. That certainly doesn’t eliminate the trading range ending with a spring, followed by a Sign of Strength and a Last Point of Support..
So where is the market going? The Wyckoff Wave is solidly in its long-term up trend channel. It appears we experienced a Selling Climax (point Q on the daily chart, point L on the weekly chart). The O – P Index has also been relatively strong when compared with the Wyckoff Wave. This gives a bullish bias for the Wyckoff Wave.
However, it is doubtful that anything will happen before there is a definitive ending action. While short-term bulls and bears try to read the political tea leaves and identify minor change in direction, intermediate and long-term investors should continue to hold their positions and enjoy their profits.
As many of these positions are taken in stocks that are stronger than the Wyckoff Wave, they will add to profits on short-term advances, but not lose as much on short-term declines.
Ending action will come when it comes. When it does, the market will make a significant move. Right now that move appears to be up.