Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 4, 2016
A Weak Rally That Doesn’t Want To End
Forty years ago, I was traveling in upstate New York on business. I was also doing some fairly significant short-term trading. I spent the night in Lake Placid and carefully reviewed my short-term positions and concluded that none were in jeopardy.
The market was quite similar to what we have seen in the last month. It was in an important trading range and had successfully tested the support at the bottom of the range. Like now, it began to rally off that support.
Also, like now, the rally was not on strong demand, but when supply came into the market it was not sustained.
I concluded that since the Wyckoff Wave was rallying off the bottom of the trading range, it would automatically go to the top of the range and ensure some excellent short-term profits.
The next morning, I left Lake Placid and drove to a town near the Canadian border. Upon arrival, I checked the market. It was in the middle of a very strong short-term reaction and every one of my stop orders have been executed. In 2 1/2 hours I lost $6,427.32. That number is indelibly etched in my mind and served as one of the great lessons I learned at the University of Wall Street.
Just because the market is moving in an expected direction, after completing a Wyckoff principle, doesn’t mean it will do what you expect. One should always look closely at what price spread and volume is telling us and, if those answers seem to conflict with our initial view, it is best to retreat to the sidelines.
It is also extremely important to consider the risk/reward ratio before taking a position.
Last Friday, the Wyckoff Wave completed a two-day rally off point O. The first day of the rally was on reduced price spread and volume, which suggested a lack of demand. The second day, last Friday, was on reduced price spread, but increased volume. This suggested the presence of supply. These are not positive indications.
In addition the Wyckoff Wave had successfully tested the high at point N and encountered supply as it did so. All this suggested that the Wyckoff Wave would react and test the lows at point O and, quite possibly, point M. This was not a good place to take a position to the upside.
On Monday, the Wyckoff Wave experienced an intra-day failure to the upside. It closed, on decreased volume, at the bottom of a wider price spread. This suggested a lack of supply.
However, a closer review of the intra-day waves, indicated the presence of supply. This suggested the reaction would continue.
This conclusion was supported by the overall poor quality market action, since the Wyckoff Wave moved through the top of the mini trading range, marked by the line drawn from point L.
This is about where the market was on that fateful Lake Placid day. But, instead of collapsing, the 2016 Wyckoff Wave continued to rally. This past week has produced a narrowing of price spread and slightly lower volume.
Because the Wyckoff Wave moved above point N, the short-term trend was changed from neutral to up. So far, the Wyckoff Wave is sitting in the middle of this trend channel and has not yet made much of an effort to test the channel’s supply line. In addition, it is encountering resistance as it approaches the old support levels at points E, C, A, Y and W.
In addition, on Monday the Technometer will open in an overbought position. Ae are also seeing some negative divergences when the Optimism – Pessimism Index is compared to the Wyckoff Wave. There also in negative divergences when the Force Index is compared to the Wyckoff Wave.
The overall quality of the rally off point M has not been good. In my opinion, there has been no good place to take short-term positions to the upside. I expect the Wyckoff Wave will react. If that happens, it will greatly reduce or eliminate any short-term profits on trades to the upside.
Like my Lake Placid story, those reactions can be fast and hard. I would rather miss a short-term opportunity to the upside, then take one when the market is sending conflicting signals.
If I am wrong, and the market continues to rally towards the top of the trading range, there will probably be some excellent opportunities to the downside.
If the market reacts, short-term opportunities to the upside can be revisited.
My Lake Placid lesson is simple. It’s not how much you make, it’s how much you don’t lose.
This week, we are introducing a new Wyckoff E-book, written by me, called Wyckoff Strategies & Techniques, Finding and Trading Winning Stocks. The book is a detailed explanation of Wyckoff principles, updated to reflect the stock market in the 21st century. The book is over 150 pages in length and contains over 50 vertical line and point and figure charts.
In addition, as an extra bonus, a free audio version, with its own charts, is included with every e-book.
We are very excited about this new publication. Learn more about my new updated Wyckoff course