Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review January 15, 2016

Click links below to view the Wyckoff Wave Daily, Weekly & 100 Point & Figure Charts
Wyckoff Chart 1
Wyckoff Chart 2
Wyckoff Chart 3

How Much More To The Downside?

This past week the stock market, as measured by the Wyckoff Wave, continued to react. The media has been full of gloom and doom scenarios, mentioning that we could be entering a recession. They provide all sorts of reasons, including the low price of oil, why the market will continue to react and that we are headed for, or already in, a bear market.

A few months ago, when commenting on down days in the market, the media suggested this was being caused by the high price of oil.

So where is the market headed? I am comfortably standing by last week’s blog post. The Wyckoff Wave is in a trading range and at the present time is seeking out a support point. Once that is established, the Wyckoff Wave should complete the trading range. This is a normal market activity and long-term bulls should maintain their positions.

Let’s look at some Wyckoff reasons behind this scenario.

Last August 24th the Wyckoff Wave went through a Selling Climax (point Q on the daily chart). This stopped the normal corrective reaction that began at the 44,500 level. There was an automatic rally to point R and a secondary test at point S. Point you could be called either a secondary test or the first level of support.

Then theWyckoff Wave rallied to the 40,300 level at point Z. This appeared to be a good resistance area that defined the top of the trading range. It then moved sideways to point D. In late December, it began the reaction that has taken us to where we are today.

A distribution trading range is identified with wide price spread and relatively high volume. The market action from point Z has been on relatively narrow price spread. While some volume came in on the downside, it was not sustained and the Wyckoff Wave was unable to react back into the trading range. This suggests the market action from points Z to D was not distribution, but simply a sideways movement within a trading range.

However, let’s assume it was distribution. There is a count of 4,800 points, along the 39,000 line, on the attached 100 Point & Figure chart. When taken from points D and F, there are objectives to the downside of between 35,500 and 34,200 on the Wyckoff Wave.

The low at point U was 35,725. The low at point Q was 34,458. These fit nicely with the Point & Figure chart objectives. If the Wyckoff Wave needs its most aggressive objective, it would slightly penetrate the support at point Q. That might even create an opportunity for a Spring.

The move to the downside seems to be slowing. During the week ending January 8, 2016, the Wyckoff Wave lost 2199 points. This past week and lost 1150 points, or about half. This suggests the reaction is losing steam. This is nicely presented on the weekly vertical line chart.

On Wednesday the Technometer moved into a clearly oversold condition. While Thursday’s rally changed the reading to low neutral, any continued reaction will put the Technometer back into a clearly, or even dangerously, oversold condition. While the Force Index is quite negative and that has a mitigating impact on any rally, the Wyckoff Wave will have a difficult time continuing its reaction when the Technometer is oversold.

On Friday, the Wyckoff Wave reacted on substantially reduced price spread and decreased volume. This suggests the presence of demand. The Wyckoff Wave is also testing the low at point U.

Much of Friday’s loss was contained in the gap opening to the downside. Large gap openings are emotional reactions and, in most cases, are filled back in as the market reverses direction.

As mentioned last week, this reaction contains more than its share of gap openings.

The Optimism – Pessimism Index is a measure of volume. It measures the amount of effort made to move the market in a particular direction. When the Wyckoff Wave is experiencing a strong reaction or a bear market, the O – P Index is stronger than the Wyckoff Wave. As of Friday’s close, it was noticeably weaker than the Wave. The Wyckoff Wave is substantially below the support’s at points C and A. The O – P Index is slightly higher. The weak O–P Index also indicates there is not that much effort supporting this reaction.

Based on the above, it appears the Wyckoff Wave is at or close to its objectives to the downside. It could simply rally off the support or possibly penetrate the trading range and put in a Spring.

These two scenarios have the highest probability of success. Instead of a calamity, there might be some excellent opportunities to the upside.