Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review, May 27, 2016

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Revisiting The Technometer & A Thought For Long Term Investors

Last week there was a small conflict between the Wyckoff Wave’s Technometer readings and the analysis of its price spread and volume. Even though the Technometer was in a clearly overbought condition, Wyckoff analysis suggested the Wyckoff Wave was not ready to react.

My Wyckoff studies tell me that when there is a conflict, stick with market analysis that studies the relationship of both supply and demand. This past week, the Wyckoff Wave rallied.

Even so, the rally was of poor quality. Although the Wyckoff Wave weakened its short-term down trend channel (drawn in red on the daily chart) it encountered resistance as it approached an earlier high at point X.

In addition, the Technometer readings became more overbought. In fact, they were more overbought than they were when the Wyckoff Wave was at points V and X.

An analysis of supply and demand suggested that little demand was present and the Wyckoff Wave was vulnerable to a reaction.

One helpful way to analyze the Technometer is in its relationship with the Wyckoff Wave. Wyckoff teaches that if the top of a market reaction is accompanied by an overbought reading that is more overbought than the last reading, but the Wyckoff Wave is unable to reach those earlier highs, it is a fairly negative indication. This is what is developing.

At point V, the Technometer reading was 53.64. At point X, it was 53.44. These are both in clearly overbought conditions. On Friday, the Wyckoff Wave posted a Technometer reading of 54.36. It is now in a more overbought condition than it was at points D or X.

By itself, that is not a significant difference. However, look at the Wyckoff Wave and its relationship with points V and X. While it is only slightly lower than point X, it is significantly lower than point V. Yet the Technometer reading is higher.

This suggested two things. The first is that it will be extremely difficult for the Wyckoff Wave to advance. It will probably have a difficult time rallying past point X. The second is that next week should bring a reaction that will return the Wyckoff Wave to its short-term down trend channel.

What kind of a reaction can we expect? So far, even though demand is being withdrawn, strong supply has not come into the market. In addition, the intra-day chart is giving us some preliminary indications about a change in direction.

On Thursday, May 19th the intra-day trend was changed to up. The Wyckoff Wave rallied and stayed within the trend for six trading days. It began to show relative weakness at point J.

There it was unable to reach the channel’s supply line at point J. Then, the Wyckoff Wave reacted to point K and moved into a slightly oversold position, relative to the trend.

Notice the market action after point K. If the trend was going to continue, the Wyckoff Wave needed to rally strongly and return to its intra-day up trend channel. That didn’t happen. Instead the Wyckoff Wave rallied very slightly, on reduced price spread and volume. While some of the lethargy could be attributed to the holiday weekend, the Wyckoff Wave’s inability to even make an attempt to return to the trend channel is not positive. On Friday, the intra-day trend was changed from up to neutral.

Often intra-day trends provide clues to future action. This appears be the case here and suggests the Wyckoff Wave is poised to react.

The real question is, how deep will the reaction be? Another clue may come from the Force Index readings. The Force Index is a measure of investor sentiment. It usually produces negative readings. The Force Index is best used when comparing it to the Technometer. If the Technometer moves into an overbought condition, but the Force Index is producing low negative, or positive readings, the expected reaction will not be particularly deep.

On Friday, the Force Index reading was +103.95. This is a strong positive readings and should have a mitigating impact on any expected reaction.

While the Wyckoff Wave is expected to return to its short-term down trend channel, the scenario where it holds above the lows at points U and S continues to have the highest probability of success.

The Wyckoff Wave has been in a trading range since the Selling Climax back in August 2015. The price spread and volume continue to suggest the trading range is accumulation and the Wyckoff Wave has more potential to the upside.

Long-term investors should be ready to take new positions on any ending action to the upside. That would be a Spring, it’s Secondary Test or a Last Point of Support.

The Wyckoff Wave is near the top of its trading range. This is probably a good time to review portfolios and weed out poorly performing stocks or those who have reached objectives. This can provide cash that can be used during ending action.

Some minor tweaking an adjustment made lead to some more significant profits.