Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 18, 2016

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Taking Positions In A Trading Range – Continued

This past week, despite all the delightful logic as to why the Wyckoff Wave would react, the rally off the bottom of the trading range (point M), continued. The Wave is now in a position to test the top of the trading range and the highs at points D, B, Z and X.

A week ago Friday, it appeared the Wyckoff Wave was putting in a successful test of an earlier high at point P. In response, the Wyckoff Wave reacted slightly on Monday and Tuesday. While the reaction was on relatively narrow price spread and lower volume, it did weaken its short-term uptrend channel.

The overbought Technometer and negative divergences with the Optimism – Pessimism Index added credence to the reaction scenario. It was not unreasonable to consider new short-term positions to the downside.

On Wednesday the Wyckoff Wave reacted, but experienced an intra-day failure to the downside. Some demand did come into the market, but a review of the intra-day waves suggested it was not particularly strong or sustained. In addition, the Wyckoff Wave was unable to return to its up trend channel.

Thursday saw a move decisive move to the upside. The Wyckoff Wave rallied on good price spread and volume and moved slightly above the high at point P. A review of the intra-day chart showed supply coming in to the market late in the trading day. Was the Wyckoff Wave putting in an intra-day Upthrust?

Short-term bears who had taken a position in the area of point P were either breaking even or experiencing a minor loss. One of the criteria for taking a position to the downside is identifying stocks weaker than the Wyckoff Wav. There was a good chance that those stocks did not rally as strongly on Thursday as the Wyckoff Wave.

Regardless, Friday was a critical day. If the Wyckoff Wave had upthrusted the intra-day trading range, good supply would’ve come in early Friday morning. The Wyckoff Wave would have reacted and begun a intra-day Sign of Weakness. If supply did not immediately come into the market, positions should be closed.

Creating scenarios and acting on them is extremely critical in a short-term trading environment.

On Friday, the Wyckoff Wave continued to rally, but did so on reduced price spread and increased volume. This suggested the presence of supply. Despite that, one could argue that the Wyckoff Wave will react and use that argument to justify maintaining their short positions.

Maybe the Wyckoff Wave will react. Maybe it won’t. We’ve just entered wishing and hoping territory.

The good Wyckoff trader, not seeing immediate early supply on Friday morning, followed his, or her Wyckoff discipline and closed out their trades. Perhaps the market will react early next week. Perhaps it won’t. Close the position! Break even or take a small loss and live to fight another day. If the short term trader does not use good Wyckoff discipline, they will lose money or, because their capital is tied up wishing and hoping, they will miss new opportunities.

When the market does not perform as expected, it is better to retreat to the sidelines and let the market give you more indications as to its future direction.

Short-term traders focus on relatively narrow moves that happen within hours, days or a couple of weeks.

Intermediate and long-term traders are not as concerned about short rallies or reactions. However, trading ranges give them an opportunity to make adjustments in their portfolios.

If the Wyckoff Wave reaches the top of the trading range, it will put in a 12 1/2% gain since the low at point M. This is a good opportunity for intermediate and long-term traders to review their portfolios and liquidate some positions.

Some stocks have been stronger then the market and have reached their objectives. Others have underperformed. Therefore, both can be sold at the top of the trading range, before any expected reaction.

These adjustments can be made to create cash that can be reinvested when the market reacts back towards the bottom of the trading range. This reaction would be expected, as the Wyckoff Wave has not gone through ending action, in the form of a spring. The move from point M has been relatively weak and it would be difficult to call it a Sign of Strength.

Trading ranges are great places to adjust portfolios and free up cash for new opportunities.

What will the Wyckoff Wave do next week? As one who was expecting and touting a reaction, I need to retreat to the sidelines and review the bidding.

On Friday the Wyckoff Wave closed right at the support line of its short-term uptrend channel. It is almost at the top of the trading range. If it is going to move strongly to the upside, strong demand needs to come into the market on Monday and the Wyckoff Wave should rally strongly through the top of the trading range.

The overall poor quality of the rally off point M. The negative divergences with the O-P Index and the inability of the Wyckoff Wave to return to its up trend channel on Friday all suggest the Wyckoff Wave will encounter resistance at the top of the trading range.

While I still favor the reaction within the trading range scenario, I would need to see more concrete evidence before considering new positions to the downside.