Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 29, 2016
Some Supply Offers New Scenarios
On Thursday, the Wyckoff Wave finally ran into some supply. The supply came in as the Wyckoff Wave reached some important support areas at the bottom of the trading range, that began in November, 2014.
This is best shown on the weekly chart. Notice, that this week, the Wyckoff Wave rallied and tested the old support/resistance line that began at point C. Then it moved to point G and continued to the right side of the weekly chart.
This past week’s market action is the last line on the weekly vertical line chart. As you can see, the Wyckoff Wave reached that support/resistance line. There it encountered supply and is reacted.
That scenario was discussed last week. This weeks blog post discusses the type of supply that is coming into the market and some new scenarios. These are best reviewed on the daily chart.
As the Wyckoff Wave approached the bottom of the old trading range, Is Technometer moved into an overbought condition. This is shown on the daily chart.
At the same time, the Force Index began to display positive readings. When a Force Index produces positive readings and the Technometer is in an overbought condition, there is a mitigating impact on the Technometer’s effect.
This meant that, while it will be difficult for the Wyckoff Wave to continue its advance, any reaction may not be as deep or long as it would be, if the Force Index was producing moderate negative readings. It is also an indication of the type of supply that would is to come into the market.
On Thursday the Wyckoff Wave experienced and intra-day failure to the upside. It closed lower, on wider price spread and increased volume. This suggested the presence of supply.
On Friday, the Wyckoff Wave continued to react. It did so on both increased price spread and volume. This also suggested the presence of supply.
While supply certainly was present, an analysis of the intra-day waves indicated that only a moderate level of supply came into the market. This was consistent with the relationship between the Technometer and Force Index. It also suggested that the Wyckoff Wave could see support between Friday’s close and the top of the trading range. That top is marked by green line drawn through points V, X, Z, and B, D, R and T.
This situation creates some new scenarios that must be kept in the back of every Wyckoff trader’s mind.
First of all, is the Wyckoff Wave going to react back towards the top of the trading range and put in a Last Point of Support? If so, that would suggest the rally from point M to point R was a Sign of Strength within a trading range and the move to point you was a Last Point of Support.
Following that logic, the rally from point U to Thursday’s high, would be a second Sign of Strength or a jump across the creek.
While that was certainly possible, the nature of both rallies suggested poor quality demand. That makes it difficult to justify Signs of Strength.
Another scenario is that strong supply will come into the market. The Wyckoff Wave will react back into the trading range and even test the lows marked by the August, 2015 Selling Climax at point G. This would require sustained supply and fairly wide price spreads to the downside coupled with strong volume. So far the Wyckoff Wave has not indicated that a strong reaction is on the horizon. As strong supply may come into the market over the next couple of weeks, that scenario cannot be ignored.
The final scenario is a continued sideways movement, which would form a new phase of the trading range. This would have the Wyckoff Wave continue to react on moderate supply and test either the top of the trading range, or the lows at points U and S.
If that happens, the Wyckoff Wave could continue its sideways movement, but the ending action would not have to be at the absolute bottom of the trading range.
This scenario appears to have the highest probability of success.
A great way to watch which scenario is developing is to pay attention to the Optimism – Pessimism Index and its relationship with the Wyckoff Wave.
The O-P Index is simply a measure of volume. The volume from each intra-day up wave is added to the index. The volume from each intra-day down wave is subtracted. This represents the amount of effort that is going into moving a stock or an index in a particular direction.
The Wyckoff Wave is a measure of price. Its relationship with the Wyckoff Wave is how much or how little effort it took to move the Wyckoff Wave to its present price level.
If the Wyckoff Wave continues to react, it will be important to study its relationship to the O – P Index, by comparing it to point U.
Notice that the Wyckoff Wave is noticeably higher than it was at point U. The O-P Index is only slightly higher. If the Wyckoff Wave reacts and its O-P Index reading moves below point U, while the Wyckoff Wave remains higher than it was at point U, this would be a positive divergence. It would suggest supply is being taken in. It would reduce the probability of a strong reaction back into the trading range. It would also increase the probability of the new phase of the trading range scenario.
If the top of the rally was Thursday’s high, it will be important to watch the Wyckoff Wave ‘sreaction, in relation to point U. If the Wyckoff Wave can hold above the halfway point of the rally from point U to Thursday’s high, this would add credence to the Last Point of Support scenario. If it continues to react past the halfway point, this would increase the probability of the new phase of the trading range scenario.
A couple of things to watch as this interesting market continues to develop.