Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review February 12, 2016

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Trading Range Scenarios

Technometer, support, resistance,
Emotions and preconceived conclusions are two of the very best ways to lose money in the stock market. The experienced Wyckoff trader always looks for multiple scenarios and what would happen if a particular scenario is going to play out.

A great way to lose money, in the stock market, is to assume a particular scenario is going to play out and sticking with it, even when market action no longer justifies its support.

An excellent example of this is found in the mini trading range that began in late January, at point G.

After some climactic action at point G and a secondary test at point I, the Wyckoff Wave rallied back to the top of the range and reacted to point K.

A support line, marking the bottom of the trading range, was drawn from point G. A corresponding resistance line, marking the top of the range, was drawn from point H.

The mini trading range was developing nicely and the next logical step was to wait for ending action. This ending action could have been in the form of a Spring, an Upthrust or simply a Sign of Strength or a Sign of Weakness. At that time, those were the four scenarios.

At point K the Wyckoff Wave experienced and intra-day failure to the downside. Demand came into the market and the Wyckoff Wave rallied, slightly penetrated the resistance, and put in a strong close. The next day, the rally continued to point L.

However, both price spread and volume were reduced. The reduced volume and strong close eliminated the upthrust scenario from consideration. Had the Wyckoff Wave “jumped the Creek” for a Sign of Strength? That was certainly possible.

A Sign of Strength needs to be confirmed with a reaction, on reduced price spread and volume, to a Last Point of Support. If the reaction is on wider price spread and increasing volume, the Wyckoff Wave would simply react back into the trading range. This would eliminate the Sign of Strength scenario.

The reaction got off to a good start. On the day following point L, the Wyckoff Wave reacted on reduced price spread and volume. That happened, a week ago, Friday. This was an early indication that the Wyckoff Wave would put in a successful Last Point of Support.

On Monday, the Wyckoff Wave reacted back to the top of the trading range. It experienced an intra-day failure to the downside.  This caused a rally off that support. Was this a successful Last Point of Support?

Price spread and volume were increased. This suggests the presence of demand. The Wyckoff Wave was in a place where it needed to definitively move into new high ground. In other words, it had to “go and go now”. With one exception, one could argue that Monday was a successful X Point of Support.

That exception was the Technometer reading. It was 49.79, just short of an overbought condition. Any continued move to the upside would have moved the Technometer into a clearly overbought condition. It is difficult for its related index or stock to continue a rally in the face of an overbought Technometer.

While it did not eliminate the Last Point of Support scenario from consideration, the Technometer reading was a major caution sign. This may not have been the best place to take new positions to the upside.

That was confirmed the next day as the Wyckoff Wave experienced and intra-day failure to the upside. This indicated supply was still present. The Wyckoff Wave did not move into new high ground and the Last Point of Support scenario was in jeopardy.

The next day, Wednesday, that was confirmed. Once again, the Wyckoff Wave put in an intra-day failure to the upside enclosed at the bottom of a wider price spread, but on decreased volume. It was unable to move into new high ground. This was a warning sigh the Sign of Strength scenario was not going to play out.

The relatively wide price spread and high volume, following the rally to point L, indicated supply was still present and certainly not dried up. The Wyckoff Wave was vulnerable to a reaction back into the trading range.

On Thursday, that’s exactly what happened. After a wide gap opening to the downside, the Wyckoff Wave continued to react and test the support at the bottom of the trading range. This is marked as point M.

This eliminated the Sign of Strength with a Last Point of Support scenario from consideration.

It also created new scenarios. They were:

  1. The reaction could have been the beginning of a Sign of Weakness
  2. The Wyckoff Wave could Spring either the mini trading range or the more significant trading range that began at point Q.
  3. The Wyckoff Wave could simply react off the support and continue in the trading range.

On Friday, the Wyckoff Wave rallied off the bottom of the trading range, but did so on reduced price spread and volume. This suggested a lack of demand. This lack of demand gives the Wyckoff Wave an opportunity to react and test the low at point M.

If the reaction is on reduced price spread and volume, it would suggest a drying up of supply and continue to keep scenarios 2 and 3 alive and well.

If the reaction is on increased price spread and volume, it gives scenario 1 a better chance of success.

There is one significant concern with scenario 1. The Optimism – Pessimism Index is extremely strong, when compared with the Wyckoff Wave. If we are seeing a weak market, it should be reflected in the O – P Index. It is not. If the Wyckoff Wave penetrates point M and moves into new low ground, they would be a significant positive divergence with the O – P Index.

In addition, the Wyckoff Wave was nicely supported at point M. Again, this was a situation where, if there was a Sign of Weakness, the Wyckoff Wave would have strongly reacted into new low ground.

As of right now, this gives scenarios 2 and 3 the highest probability of success. The answers will probably come this week. An early key will be the quality of any reaction.

On Friday, the Technometer closed in a slightly overbought condition. As it will make it difficult for the Wyckoff Wave to advance, a reaction to test the lows appears to be the next reasonable market action.

Which scenario will succeed? I don’t know. It’s best to keep all options open and let the market tell you what it’s going to do.