Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 8, 2016
Accumulation – Boring Is Good
This past week the Wyckoff Wave lost a miniscule 204 points. That was a reaction of one half of 1%. Since breaking the short-term uptrend channel at point R, the Wyckoff Wave has moved sideways for almost 3 weeks, in a very narrow trading range.
The Wave is at the top of the trading range that began last August. Since then it has established both support and resistance lines and continues its slow sideways move.
For several reasons, this trading range appears to be accumulation, not distribution. Today’s blog post includes a more detailed look at why the trading range appears to be accumulation and what we can expect when it ends.
Accumulation is a trading range where an attempt is made to encourage weak hands to sell and strong hands to buy. This is done using two important strategies.
The first is relatively sharp declines that scare many investors and caused them to liquidate their assets. The first was last August’s Selling Climax, marked on the daily chart as point Q.
After the Selling Climax, the Wyckoff Wave established important resistance and support levels. Whey are both drawn on the daily chart.
The second sharp decline began at point D. The Wyckoff Wave had rallied to the top of the trading range and had moved sideways for several weeks. Suddenly, it reacted sharply towards the bottom of the trading range. The reaction ended with a minor Selling Climax at point G. The reaction was accompanied by bad news, which also encouraged weak hands to sell their stock.
After a sideways move, in a bit of the mini trading range, the Wyckoff Wave gradually rallied back towards the top of the range. The rally was not particularly strong. Also, while the reaction from point D took a little over three weeks, the rally back to point R took about six weeks. This suggested that as the professionals were not in a great hurry to mark up stocks and the trading range would probably continue.
The second accumulation strategy is the creation of a dull market. Investors and traders like market action. They like to look at their portfolios and see a nice daily gain. When that doesn’t happen, they often look elsewhere for opportunities that will give them a better return on their investment.
That is exactly what happened at both points X and R. The Wyckoff Wave rallied, established, or in the case of point R successfully tested, the top of the trading range and began a long slow sideways movement.
Like the move from points X to D, that preceded the sharp reaction, the same can be expected as this present sideways move develops. The investor or trader becomes bored with the lack of market action. Suddenly there is bad news in the market reacts. This is exactly what the professionals want and the combination of dullness and a sharp reaction leads to more liquidation.
The accumulation process will continue until much of the available supply is taken in by the stronger hands.
Then, suddenly there will be ending action, most likely in the form of a Spring. Instead of successfully testing support at the bottom of the trading range, the Wyckoff Wave will move through that support on good price spread and volume. This gives the impression that the markets are going to crash. It also motivates many of the remaining weak holders to liquidate their stock.
Suddenly, strong demand comes into the market and the Wyckoff Wave springs back into the trading range. Little supply is left and this causes prices to rise and the market to rally. The professional traders have accomplished their goal and are now ready to move the market strongly to the upside.
This effort is helped by the weaker holders, that originally sold their stock, and are now trying to get back in to the market.
For these reasons, I strongly believe that this trading range is accumulation. This would mean the Wyckoff Wave is going to react back towards the bottom of the trading range, at least one more time, before a significant move to the upside.
The reaction could begin this coming week or the Wyckoff Wave could move sideways. So far, when the Wyckoff Wave is made an attempt to react, there has been no follow-through. This allows the Wave to rally, like it did on Friday.
However, there is little demand on these minor rallies. This market action suggests the boring sideways movement is accomplishing its objectives. These are excellent conditions for the appearance of supply. Supply that is needed for the expected short-term reaction, back towards the bottom of the trading range.
While the stock market is going through relative dullness, there may be some bright light at the end of the tunnel.