Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review February 5, 2016
Testing The Bottom
Are We Seeing A Mini Trading Range?
This past week, the Wyckoff Wave reacted and, for the second time, tested its January low at point G. On Wednesday, it rallied off that low at point K, move through resistance at points J and H. Ahe Wave returned to its intermediate downtrend channel. The channel is drawn in red.
In the process it broke the short-term down trend channel, drawn from points D and E. This change the short-term trend to neutral.
On the surface, the successful test and the rally through the earlier resistance, could suggest the Wyckoff Wave was prepared to move quickly back to the top of the trading range. However, at Thursday’s close, the Wave’s Technometer was in an overbought condition. The Wyckoff Wave had also moved into some negative divergences, when compared to its Optimism – Pessimism Index. The O – P Index was producing a great deal of effort, and had moved higher than the trading range highs at points B, Z and X. The Wyckoff Wave was still near the bottom of the trading range.
Finally, the sideways move from point G had been on relatively higher volume. This suggested some supply was still present.
It seemed difficult that the Wyckoff Wave would be able to rally in the face of these negative conditions.
On Friday, the Wyckoff Wave reacted on narrower price spread and reduced volume. This suggested a lack of supply. It also presented another interesting scenario.
Back in January, the Wyckoff Wave had ended the reaction off point D at point G. At point G there was wider price spread and noticeably higher volume. This could have been climactic in nature.
If we make that assumption, the rally to point H was an automatic rally and the reaction to point I was a secondary test. The Wyckoff Wave rallied to point J, which was a successful test of the resistance at point H. It then reacted to point K which was a successful test of the support at points G and I.
So far, it appears the Wyckoff Wave is simply testing the bottom of the trading range, as it has held above the more significant support at point Q. Remember that point Q was a Selling Climax that stopped the reaction from the March, 2015 highs. It is the beginning of a significant trading range that has not yet experienced ending action.
That’s the bigger picture. Are we seeing a mini trading range that began at point G? Let’s go back to our interesting scenario.
Ending action that precedes a rally, does not need to end with a Spring. It can also end with a Sign of Strength and a successful Last Point of Support.
Look at the market action to the right of point G and assume that point G is a mini Selling Climax. This gives us a support line drawn from point G and a resistance line drawn from point H.
This would suggest that on Wednesday and Thursday, the Wyckoff Wave rallied through the resistance at the top of the mini trading range and “Jumped the Creek”. Friday’s reaction could have been the beginning of a reaction to a Last Point of Support.
If that scenario plays out, and the Wyckoff Wave successfully “backs up to the Creek”, a count on the 100 Point & Figure chart can be taken in the vicinity of the 36,000 line. This would provide an estimated upside objective of between 39,800 and 41,000. The high at point Z is 40,300.
While this mini trading range is a short-term indicator, it does provide justification for a move back to the top of the trading range.
It is important to understand that there has been no Last Point of Support, that would confirm this scenario. It is also quite possible, the Wyckoff Wave will react back into the trading range and, once again test the lows at point G.
That, in itself, could provide the impetus for a move back to the top of the range.
This mini trading range does indicate that it will be difficult for the Wyckoff Wave to react through the support at point Q and into new low ground. This is because supply, in the form of an Upthrust, did not appear on either Thursday and Friday. On Friday, instead of coming into the market, supply began drying up.
This mini trading range could serve as a timing indicator to take short-term positions to the upside. It’s also fun to watch as there is a Wyckoff concept in play.
Short-term traders will get their answer next week, as there could be a couple of entry points for trades to the upside. The entry points will either be a successful Last Point of Support for a successful test of the bottom of the trading range.
One important point, be careful of taking new positions to the upside, if the Technometer remains overbought or in a high neutral condition. This would indicate supply is still in the market and could have a mitigating impact on the strength of any rally. While the strong Force Index, may mitigate that situation, it is difficult for a good rally to develop in the face of an overbought Technometer.
It will also be extremely important to watch the relative price spread and volume, if the Wyckoff Wave continues to react. Narrow price spread and noticeably reduced volume would indicate supply is drying up and improve chances for a good rally. If this happens, they will also be a reduction in the Technometer reading.
Trading ranges can be a bit boring for traders who enjoy market action. It’s nice to see a little Wyckoff indicator every now and then.