Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 22, 2016
How Long Can This Poor Quality Rally Last?
This past week the Wyckoff Wave continued its poor quality advance, which began, in early April, at point U, on the daily chart. The rally has been on relatively low price spread and moderate volume. A daily review of the Wyckoff Wave and its intra-day waves indicates a significant lack of demand.
Wyckoff teaches that a lack of demand opens the door to supply. Supply comes into the market and the reaction begins. So far, that isn’t happening. To find out why, let’s go back to basic Wyckoff and the concept that accumulation is the process by which strong, or professional, hands obtain stock from the public. Once enough stock has been accumulated and there is little supply, a stock or index can easily advance.
The question is why isn’t the public selling their stock? An answer to this question may be found on the Wyckoff Wave’s weekly chart.
In November, 2014 the Wyckoff Wave had rallied to point B on the weekly chart. It was in a slightly overbought position, relative to the long-term up trend channel. This channel had been in place since the 2008-2009 bear market. At point B, the bull market had lasted for a little over five years. Enthusiasm was strong, as many felt the rally could go one for a long, long time.
That didn’t happen. As you can see on the weekly chart, the Wyckoff Wave moved sideways and put in a slightly higher high at point F. The rally to point H did not put in a new high and the Wyckoff Wave reacted to point L.
The reaction ended at point L, which was a Selling Climax. This was a normal corrective reaction. It held above the halfway point of the rally from an earlier period of accumulation. Pn October 2011 (this point H does not appear on the weekly chart) to the high at point F. This is a rather reasonable reaction after such a long and wonderful bull market.
Throughout the bull market the public had continued to purchase stocks. While some supply did come in during the sideways movement, beginning at point B, the relative shallowness of the normal corrective reaction to point L suggests the professionals continued to hold shares.
Notice the support line drawn through the sideways movement that began at the first support area at point C. The line was drawn through points C and G. Then, it continued to the right side of the chart. This is an important support/resistance line that could come into play in the near future.
After the selling climax at point L, on the weekly chart, the Wyckoff Wave moved sideways. It established a resistance level at point O and support at point P.
The public, who had purchase stocks in the bull market and especially during the sideways movement, that began at point B, got very nervous on the reaction to point L.
I received a few e-mails suggesting that the bull market was over and everyone should get out of the market.
Was the bull market really over? If so, what other investment options are available? The public’s answers to those questions could provide the key to the poor quality rally.
Usually at this time, the public, seeing a nice rally, uses it as an opportunity to get out even or with a small loss. However, because of the artificially low interest rates, there simply aren’t very many other options. Therefore, the public hopes the market will continue to rally and they can get back their initial investment.
That logic suggests there is a fair amount of overhanging supply in the sideways movement that began last November, at point B. The Wyckoff Wave is approaching that old support, now resistance line marking the bottom of the sideways movement. This is probably where supply will begin to come into the market and stopped the advance.
In normal economic times, the supply would’ve come in sooner. However, because the Federal Reserve has established artificial controls to market activities, the lack of alternative investment options keeps more of the public in the stock market.
The overhanging supply is most certainly present. It may need a bit of the catalyst, like some bad news, too begin the reaction.