Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 11, 2016
Taking Positions In A Trading Range
Stock Market Institute icon, Robert Evans, was not a big fan of taking short-term positions in a trading range. Mr. Evans was an intermediate to long-term investor and didn’t pay great deal of attention to short-term moves. It is my understanding that he rarely took positions if the estimated gain was not at least 15 points.
Others at Stock Market Institute were more interested in short-term positions. Using their Wyckoff strategies and techniques they had excellent success with short-term or swing trades.
While short term trading can be a little tricky, as Wyckoff indicators like Springs, Upthrusts and Last Points of Support or Supply are not available, Wyckoff concepts and the Wyckoff Tool Kit can be extremely helpful in identifying changes of direction within a trading range.
It is quite possible that this past week’s market action is telling us that we are at one of those trading range turning points.
First, let’s briefly review the bidding. On August 24, 2015, the Wyckoff Wave experienced a Selling Climax at point Q. There was an automatic rally to point R and a Secondary Test at point S.
Then, the Wyckoff Wave began to move sideways and put in its first resistance point at point X. The Wave continued to point D and then reacted to point G. In addition to being another successful test of the Selling Climax, point G confirmed an important support area in the developing trading range.
By the middle of February, the Wyckoff Wave had moved sideways to point M and began to rally off the bottom of the trading range. This rally reached its apparent top at point P, where it appears demand is being withdrawn.
After the Wyckoff Wave rallied past the high at point N, the short-term trend changed from neutral to up. The support line was drawn from point M through point O. The parallel supply line was drawn from point N. So far, the Wyckoff Wave has been unable to reach that supply line..
This past Monday, the Wyckoff Wave reached point P. It did so on reduced price spread and volume. This suggested a lack of demand. This lack of demand was an indication that the rally was in jeopardy.
In addition, the Technometer was in a very overbought condition. A further review showed a short-term negative inharmonious action, when the Wyckoff Wave is compared to the Optimism – Pessimism Index. At point P, the Wyckoff Wave is noticeably higher than it was at point N. However, the O-P index was almost at the same level. That suggested there was not much effort attempting to move the Wyckoff Wave higher. This is indicative of a lack of demand.
Finally, when compared with the same two points, the Wyckoff Wave was in a negative divergence with the Force Index. Even though the Wyckoff Wave was higher, investor sentiment, which is measured by the Force Index, was lower than it was at point N.
All this suggested the rally was ending and a reaction back to check the support levels was in the offing. This meant short-term positions, to the downside, could be considered.
On Tuesday, the day following point P, supply did come into the market and the Wyckoff Wave began to react. It was not a strong reaction, but a beginning. Wednesday brought a slight rally on reduced price spread and volume. This suggested a lack of demand and did nothing to indicate the reaction would not continue.
Thursday was a disappointment for the bears. After a brief rally, the Wyckoff Wave experienced an intra-day failure to the upside. Good supply came into the market. The Wyckoff Wave reacted sharply and penetrated the short-term uptrend channel’s support line. There it encountered demand and the Wyckoff Wave rallied back into the trend channel. Was this a resumption of the up move or a test of point P?
Part of that answer arrived on Friday. After a wide gap opening to the upside, which encompassed most of the day’s gain, the Wyckoff Wave made little progress and began to encounter some overhanging supply.
The Technometer had returned to a clearly overbought condition and the Wyckoff Wave’s longer-term negative divergence with the O – P Index, when compared with the top of the trading range, continued.
These negative indicators suggest it will be difficult for the Wyckoff Wave to continue its advance. This gives the reaction scenario a good chance of success. If the test of point P is successful, new and additional short-term positions can be considered to the downside.
If this observation is correct, how far will the Wyckoff Wave react? There is no ending action or Last Point of Supply. So far there is only a count of 1,100 points on the 100 Point & Figure chart. However, not only is that incomplete, but as there are no Wyckoff indicators, on which to base account, it is a rough estimate, at best. The Wyckoff Wave could easily react all the way to the bottom of the trading range.
If the market reacts, as expected, short-term traders should watch the Wyckoff tools closely. Oversold Technometer readings and positive short-term divergence’s with the O – P Index are indications that the reaction could be slowing and positions could have reached their objectives.
While it is always helpful to trade in concert with the market, these indications are best found on your analysis of the stock that is being traded.
Finally, short-term scenarios can be tricky. Stop orders should be placed and closely watched. If strong demand comes into the market, position should be closed.