Where Do We Go From Here?

Last week’s Market Letter anticipated three scenarios as the Wyckoff Wave approached the resistance formed by last May’s highs.  The scenarios were:

1.  The Wyckoff Wave could rally strongly through the resistance and continue its advance.
2.  The Wyckoff Wave could upthrust the resistance.
3.  The Wyckoff Wave could react to test the short term uptrend channel or even back to the support/resistance line drawn from K.

This week’s market action eliminated one and possibly two of these scenarios.  Since the Wyckoff Wave penetrated the resistance, scenario number three can be illuminated. However, two possibilities still remain.

Last Monday, the Wave rallied on decreased price spread and slowly increased volume.  Its high for the day was right at the resistance line.  This anticipated supply was present and that the Wave may well begin to react.  This anticipation continued through Tuesday’s gap opening to the down side.  Then, the Wyckoff Wave spent the rest of the day rallying and closed at the day’s highs.  The wider price spread and decreased volume suggested a lack of supply. This opened the door for a second attempt to penetrate the resistance.

And penetrate it did.  After a weak opening on Wednesday, the Wyckoff wave rallied strongly and penetrated the resistance.  The increased price spread and volume put the strong rally through the resistance and upthrust scenarios in play.

One small clue was the decrease in volume.  If the Wyckoff Wave was going to drive through the resistance and continue to rally, it would’ve been helpful if strong demand had been present.  While a lack of supply is not a negative, increased spread and volume at this critical juncture would have helped the Wyckoff Trader come to a more positive conclusion.

This made Thursday a very critical day. The Wyckoff Wave experienced a gap opening to the upside and then reacted to close lower and just above the resistance on reduced spread and increased volume. The day’s market action strongly suggested an upthrust. Reduced spread, increased volume and a poor close, as the Wave is trying to leave the resistance area to the upside, are all indications that supply has come into the market.

The Wyckoff Wave was then expected to react and, most probably penetrate the support line drawn through points P & R.  It also could easily react back towards the old resistance at point K.

However, the stock market does not make things easy.  Instead of increased spread and volume to the down side, Friday brought decreased price spread and slightly increased volume.  This would suggest a lack of supply.  That is exactly what was not expected.  What does that mean and where do we go from here?

It is still appropriate to anticipate the upthrust scenario.  This would have allowed aggressive short-term traders to the down side to take a position during the day on Thursday.  Despite Friday’s market action, these positions can be maintained. However, stops should be crowded and positions closed if Thursday’s high is taken out.

Intermediate term traders to the upside should have anticipated a reaction and already decided if they were prepared to ride this reaction out or when and if they would close out their trades.

Now, let’s look a little deeper into next week’s potential market action.

The Wyckoff Wave is in an apex.  The resistance is the line drawn from point G.  The support is the line drawn through points P and R.  Wyckoff teaches us that when an index or a stock is in an apex it will depart that apex quickly and decisively.  That would suggest our questions will be answered on Monday or at the latest on Tuesday.

An examination of the 12 Wyckoff Wave stocks tell us that eight are in an overbought condition, relative to the Technometer.  Four are neutral and none are oversold.  In addition, seven of the 12 stocks are weaker than the Wyckoff Wave.  Three are stronger and two are the same.  This would suggest a bit of a weakness and adds credence to the upthrust scenario.

However, the stock market is a cruel mistress.  Friday’s action suggested a lack of supply and made the Wyckoff Wave more vulnerable to advance.  While this would be a risky place to take or add to long positions, it is possible that the Wyckoff Wave could put in a strong day on Monday.  This is why short term shorts, who have anticipated a downturn, need to be on their toes if the market reverses.

If the Wyckoff Wave does react, there is a strong area of support around the 25,000 level.  Not only would any reaction encounter the resistance/support line drawn through point K, but also support line H – P and the long-term supply line drawn through G and S.

If the Wyckoff Wave reacts toward the support, it would also create a helpful Last Point of Support that would set the stage to continue a strong rally to the upside.

While it is logical and acceptable to anticipate that this will happen, it is extremely important to consider all alternatives and make action plans in case the market doesn’t behave as expected.

Situations like this are wonderful opportunities to practice trade. It’s a great time to test your Wyckoff tools, at a critical moment and develop additional market insight.

Anticipating the Stock Market

This week the stock market, as measured by the Wyckoff Wave, continued its slow advance. The individual trading day’s market action has produced indications of supply and lack of demand.  Each time it appears the Wyckoff Wave may be ready to react, it continues its slow tedious advance.  What does one make of this and, more importantly, how does one anticipate the market’s future direction?

One tried and true Wyckoffism is to “profit in what you anticipate, not in what you see now”.  In order to do that it is important to look at a broader picture and reflect on the motives behind the market action.  In determining why the stock market is behaving in this manner can be extremely helpful in anticipating its future direction.

To begin, let’s return to the May, 2011 highs that are marked on the attached chart at point G.  Point G is the high found at the end of the bull market following the crash of 2008.

By rallying to point G, the Wyckoff Wave had nicely exceeded the halfway point of the Bear Market, which is marked on the attached chart.  It then moved sideways and, in July, 2011, reacted to point X.  Point X was a Selling Climax. There was an automatic rally to point Y and a secondary test at point Z.  The trading range experienced a selling climax at point H and began to rally.

This was a well-defined trading range that certainly can be called a period of accumulation.  If we investigate the counts on the 100 point figure chart at the 24,800 level, we can identify three phases. I originally only identified two phases but have added a first phase from Points H to F. Phase 1 gives us an objective of 27,600.  This has already been accomplished.

Phase 2 is from point H to point C.  The objective here is 36,000.  Phase 3 is from the spring at point H all the way over to the selling climax at point X.  This objective is 37,200. As you can see the last two objectives have not yet been made.

It can be argued that a count can be made from point P (Last Point of Support) over to the spring and then, through the trading range, to the Selling Climax at point X.  While I have taken these counts, I would prefer to see the more conservative counts work out before anticipating these more aggressive counts.

Based on the period of accumulation and the Point and Figure Chart counts, we can anticipate the market continuing to rally.  This does not mean it will, it only means it appears it may.

Let’s look at some additional clues.  When the market reacted last spring and summer, we can draw a supply line through point G and the Last Point of Supply at point S.  After the Wyckoff Wave rallied to point K, it moved sideways and then tried to continue the rally.  It ran into trouble at point G.  Notice that point G is right at the long-term supply line.  Late arriving Bulls, who had bought in last Spring’s distribution area, were now trying to get out even.  This caused a reaction to point R.  This is a normal place for a reaction and one that could have been anticipated. Sometimes we spend most of our time looking at a shorter-term view of the market and miss the larger picture.  I certainly plead guilty to the above charge.

On the way, the Wave weakened the long term supply line at point S.  It then had a brief, one-day reaction to point T before it resumed the rally.  The reaction to point T broke the long – term down trend channel and is another bullish indication.

What could the Wyckoff trader anticipate at both the rallies to point G and point S?  These were potential upthrusts.  The long term down trend channel was still in effect. There were reasonable counts from both potential upthrust to point K.  A mitigating concerned was that the halfway point of the reaction from point G to point X had been exceeded. Even so it was reasonable to anticipate a significant reaction.  If we anticipated a reaction, what would we expect to see?  Supply.  Supply.  Supply.  Supply would have quickly and strongly come into the market.  The reaction would have been fast and strong.  Remember, a bear market is much more orderly than a bull market.  That didn’t happen.  Instead, the Wyckoff  Wave reacted for over two weeks and held above the halfway point of the previous rally.

The reaction from point S, as mentioned above, was even shorter and the Wyckoff Wave continued to advance.

Anticipation is not predicting what the market will do.  It is looking for the market to behave in a particular manner that will justify your conclusion.  If it does not behave that way, immediately look for answers and other options.  Too many traders make decisions on the market’s future direction and then, when it goes against them, spend valuable time and money trying to justify their initial decision.

After the reaction to point R, the Wyckoff Wave began its long slow push to Friday’s close at 30,914. Look where it is.  The old high at point G was 30,038.  The Wyckoff Wave is knocking on the door of an important resistance level.

The Wyckoff Wave is at a potential turning point.  We can anticipate three possible actions.

1.  It can rally strongly through the resistance and continue its advance.
2.  It can upthrust the resistance.
3.  It can react to test the short term uptrend channel or even back to the support/resistance line drawn from K.

Let’s look at all three options.

1. While anything is possible, this looks like the least likely of the three scenarios.  The Wyckoff Wave is in an overbought condition relative to its Technometer.  The Optimism – Pessimism Index is in an overbought position relative to its up trend channel.  In addition, there is a very short-term change of character, that is creating a negative divergence.  Notice how Friday’s Wave moved into new high ground, but the O – P Index did not.  The Force Index is not rallying to support the Technometer.  Again, these are short term observations.

Those who anticipate this scenario should expect to see strong spread and volume to the upside early next week.

2. While the above items do not help support scenario number one, they are certainly helpful to those anticipating an upthrust.  Those who expect this scenario should see supply come in as the Wyckoff Wave penetrates the resistance.  This will be immediately followed by strong spread and volume to the down side.

3.  Once again, the negatives expressed in scenario 1, are positives to those anticipating a corrective reaction.  Those who expect this to happen can look for the inability of the Wyckoff Wave to penetrate the resistance.  The Wave should then react towards the support line or even the resistance/support line drawn from point K on reduced spread and volume.  This will not be a quick reaction.

What will the Wyckoff Wave do?  I prefer to anticipate all three and then see what the market tells me.  This is not a time to take new positions.  It is a time to watch, wait and learn.

Timing When To Take A Position

Last week the stock market, as measured by the Wyckoff Wave, rallied to a high at point S.  It then began what some thought would be a reaction to a Last Point of Support. Yours truly was part of that group.

However, a funny thing happened.  On the second day of the reaction demand came into the market.  That was followed by a day that lacked supply and then a day that lacked demand.

To confuse the situation even more, last Tuesday brought a large gap opening to the upside.  However, there was no follow-through and the decreased spread and increased volume indicated supply had again appeared.  On Wednesday, Thursday and Friday, the Wyckoff Wave either opened to the down side or experienced an intra-day failure to the down side.  This would suggest that supply was taken in and demand was ready to take control of the market.

Does this mean we are at an entry point to the long side? Or, if we have already entered, is this a good place to add to our long positions?

I felt Thursday’s action was quite significant.  Not only did we see an intra-day failure to the down side, but an analysis of the Wyckoff Wave’s intra-day waves suggested that supply had really dried up and the Wyckoff Wave was in a position to break out to the upside. In the words of Mr. Bob Evans, “it needed to go and go now”.  That didn’t happen.  On Friday more supply came into the market.  While it was, once again, taken in and demand came back into the market, the day was not as positive as Thursday’s.

Obviously, the Wyckoff Wave did not “go and go now”.  This means the breakout scenario was incorrect and everything needs to be reevaluated.

This allows me to introduce, what I think is, an extremely important concept.  If the Wyckoff trader comes to a conclusion and takes a position on that conclusion and if the market does not behave as expected, the conclusion should be discarded and the situation completely reevaluated.

Why is this important?  Too many traders (and I am one) have lost money by logically creating a scenario and seeing something else transpire.  That, by itself, is going to happen.  The problem arises when the Wyckoff trader then tries to justify the original scenario.  Good Wyckoff logic becomes wishing and hoping and all of a sudden minor losses become significant losses.

For example, let’s pretend that a position was taken in the Wyckoff Wave either late Thursday or early Friday morning.  After Thursday’s market action, the Optimism – Pessimism Index was contained in the uptrend channel.  The Technometer was neutral and the Force Index was rallying and, on a strong rally, would have reduced the impact of an overbought condition on the Technometer.  Again, the most important indicator was the drying up of supply seen on the intra-day waves.

Then on Friday morning the Wyckoff Wave reacted.  While it rallied later in the day and closed at the high, it did not perform as expected.  This means any long positions are in jeopardy.  A new plan needs to be established, which is primarily concerned with setting an exact exit point.  If the market rallies next week we are in good shape.  If it reacts, we need to make sure we have a definite exit point, regardless of our original stop order.

In this particular case, a great deal of attention should be paid to the support line of the uptrend channel.  If the Wyckoff Wave penetrates that support line, the position must be closed.  No ifs  ands or buts. No emotional justification.  Just close the position.

If the reaction continues and there is a definable Last Point of Support, you can reenter the market from a position of strength.

In my opinion, this is a very big deal and a significant reason why traders lose money.  I know.  I paid a fair amount of tuition to the University of Wall Street before I figured it out.

Now, after Friday’s market action, let’s look at the Optimism – Pessimism Index.  It is in a slightly overbought position, relative to its up trend channel.  The Technometer is also slightly overbought, but at a lower level. The Force Index reacted very slightly.  While none of this is horrible, it is not what was expected a mere 24 hours ago.  The Wyckoff Wave is still in a short-term uptrend channel.  Supply has not been able to take control of the market and we could simply be seeing more adsorption.

The Wyckoff Wave is holding above the now support/resistance line drawn from point K and the halfway point of the rally from points R to S.  In addition, the rally to Thursday’s high can be seen as a weak test of the rally to point S.  Weak tests usually require a second test and the Wyckoff Wave may simply be moving sideways to take in more supply.

In my opinion, we are still in a positive situation, but it is always best to prepare for a reversal and have an action plan established before bad things happen.

Trading in the stock market requires preservation of capital.  Therefore, it’s often not how much you make, but how much you don’t lose.

The Market is Reacting.  Are We Seeing a Change in Character?

Last Monday, the stock market, as measured by the Wyckoff Wave reached an important high and began to react.  Is this normal and expected, are we seeing an important change in character that will negate the positive action of the past three weeks?

Are we experiencing a normal corrective reaction, that in this case is also a backup to the last resistance line (or the Mr. Evans’ creek)? Or, as some have opined, are we seeing an Upthrust after Distribution and is the market beginning an important reaction?

In order to investigate this further, it is important to review and understand, what is known in the Wyckoff world as a change in character.  A change in character is nothing more than when the market behaves differently than it did previously.  The character of the market (or an individual stock) can be either demand, supply, lack of demand, or lack of supply.  Of these, demand and supply are the most important. A stock or index’s character can be demonstrated on either a very short-term basis (one day to the next) or over a longer period of time.

These changes of character, coupled with the Wyckoff tools that include the Optimism – Pessimism Index, Technometer and Force Index, can provide important clues as to the future direction of the market.

To help understand this concept, let’s review the action of the Wyckoff Wave beginning with the spring that took place last October 4th.  It is marked as point H on the attached chart.

The day before the Spring, the Wyckoff Wave reacted strongly on increased spread and volume. Supply was definitely present and the Wave was rocketing towards the bottom of the trading range.  Based on the day’s action there seem to be an excellent chance that the Wave would break through the support and Fall Through the Ice, for a major Sign of Weakness.

The next day, the Wyckoff Wave opened lower and it appeared that it was going to move through the bottom of the trading range into new low ground.  Then, all of a sudden, there was a change in character.   If we analyzed the day’s action, we would call it an intra day failure to the down side and a rally on increased spread and volume.  Demand came in and point H was a Spring.  We went from strong supply to strong demand.  This is a change in character.  However, it is only a change of character on a very short-term basis and needs to be confirmed.

One easy way to confirm this would be a test of the Spring.  This didn’t happen.  The Wyckoff Wave rallied directly to the top of the trading range.  The rally was on decent spread and slightly decreasing volume.  However, while some days demonstrated a lack of demand, supply was not present.  The Wave rallied fairly easily to the resistance drawn through point A and, so far the positive character of the Wyckoff Wave remained unchanged.

Then, at point I the Wyckoff Wave rallied on reduced spread and increased volume.  It also closed near the low of the day.  This suggests supply is coming into the market.  This is also a single day change in character.

However, one day does not change a trend.  It is simply a flashing light that tells us to be observant. This is also a place where we would expect to see supply.

The next three days suggested a lack of demand.  The expected supply was simply not coming into the market.  Then, after briefly reacting to point J, strong demand appeared and the Wyckoff Wave rallied on increased spread and volume.  While this good demand could help define this area as absorption, the key ingredient was that the expected supply, and therefore a new change of character, did not appear.  This would make the Wyckoff Wave vulnerable for a continued rally.  And rally it did, up to point K.

The Wyckoff Wave had penetrated the resistance (jump across the creek). When this happens there are three options.  The Wave can react and have a successful Last Point of Support.  It can Upthrust the trading range and begin a reaction.  Finally, it can simply begin a new trading range.  In this case, the Wyckoff  Wave experienced the third option.

However, it is important to understand that the character of the Wyckoff Wave has not changed since the spring at point H.

The Wyckoff Wave then reacted two point L.  It was a three-day reaction.  The first day suggested a lack of supply.  The second day suggested a lack of demand.  On the third day, after a huge gap opening to the down side, on bad news from Europe, the Wyckoff Wave experienced a narrower spread and increased volume.  This suggests demand has come into the market.  Therefore, despite a fairly significant reaction from point K to point L, the character of the market did not change.

The Wyckoff Wave then moved sideways to point O.  While there was one day of good supply on the reaction to point N, it was not sustained and the low at point N was higher than point L.

After rallying to point O, which was basically the same as point M, the Wyckoff Wave reacted to point P.  For the first time we are seeing supply come into the market.  As the reaction continued, a significant change of character had to be considered.  In fact, if we were just using the Wyckoff Wave as our only tool, we would have to say the character of the Wave had changed and supply was now in control.  We could certainly expect the Wyckoff Wave to react back into the original trading range and, quite possibly test the old support levels at point H.

However, the Wyckoff trader has a few more tools.  One of the most important is the Technometer, which is doubly effective when used with the Force Index.

As supply came in and the Wyckoff Wave reacted through the creek and back into the original trading range, look at the Technometer.  There is a huge positive divergence.  The Wyckoff Wave is substantially more oversold than it was at point H.  When the Wyckoff Wave or and individual stock becomes more oversold on its Technometer, but is higher than a previous low, we should look for a rally.  When the Force Index experiences the same positive divergence as the Technometer, this adds even more credibility to this thesis.  In addition, the Wyckoff Wave respected the halfway point of the move from point H to point K.

While we have seen a change of character, these Wyckoff tools are telling us things may not be exactly as they seem.

The Wyckoff Wave put in a low at point P and then rallied sharply to point Q.  Because the low at point P was put in on the day after Thanksgiving, which was a shortened market day, the low volume was a bit skewed.  Even though there was only one strong demand day, the Wyckoff Wave rallied easily to point Q.  This would suggest supply was diminished, demand was back in control and the character of the Wyckoff Wave had changed once again.

The Wyckoff Wave reached and slightly up thrusted the new trading range at point G.  Once again, we should expect supply to come in and it did.  However, was this a change of character.  On the surface, it certainly was.  If you look at the day’s action on the reaction from point Q to point R there were several days when supply was in total command.  However, we need to also look at the results.  The reaction from points Q to R lasted for 10 trading days.  In that time it reacted less than half the distance of the previous reaction from points O to P.  It also respected the halfway point of the rally from point P to point Q.  In other words while we can certainly justify supply coming into the market, it appears there were many buyers quite prepared to take in the shares that were being sold.  While good supply would suggest a change of character, one needs to see results.

This observation is confirmed when all the lost ground was recovered in three trading days as the Wyckoff Wave rallied smartly from point R.

Again, the Wyckoff Wave reached the top of the new trading range and this was the perfect place for supply to return.  Instead, the Wave continued its rally to point S.  Interestingly, most of the days suggested a lack of demand.  This lack of demand made the Wyckoff Wave extremely vulnerable to supply and an important change of character.  However, so far supply has not come into the market.  Instead, on the two days following point S we saw supply appearing early in the trading day.  It was easily absorbed and followed up with strong demand.  This was especially apparent on Thursday as the Wave reacted in the morning and rallied strongly to close near the day’s high.  The intra day up waves were primarily responsible for the day’s high-volume. Then on Friday, we saw reduced spread and volume which suggests a lack of supply.

The above suggests that, with a minor exception of the rally from points O to P, which was placed in question by the actions of the Technometer and Force Index, the Wyckoff Wave has maintained a positive character since point H.

The Wyckoff Wave is in a short-term uptrend and may well be reacting back to the resistance line drawn from point K.  This lines up with the support line of the short term uptrend channel and the halfway point of the move from R to S.

In addition, if we see supply come into the market, it may well be the situation like the reaction to point P, as the Technometer has a good chance of becoming oversold while the Wyckoff Wave is at a higher level than either points R or P.

It is important to watch the character of an individual stock or index as it develops.  In the basic course, it is described as small waves on the ocean.  By themselves they don’t seem to be much, but as they develop and experience outside influences, they can grow and become extremely powerful.

One final note: Last weeks Market Letter included a weekly chart of the Wyckoff Wave. Below the chart were charts of the Optimism – Pessimism Index, the Technometer and the Force Index.  I should have removed the Technometer and Force Index from the weekly chart.  Both of these important Wyckoff tools are daily moving averages and become skewed wave viewed in a weekly or monthly chart.  Simply put, the Technometer and Force Index must only be used when viewing a daily chart of the Wyckoff Wave or any of the individual stocks in the charting service.

My sincere thanks to those who brought this to my attention and my apologies for providing this incorrect and unnecessary information.

Are We Ready to Rock and Roll?

Ask the Technometer

Despite a week of holiday trading doldrums, the stock market as measured by the Wyckoff Wave, sent us an interesting message.  It didn’t go down.

Over the last six trading days, when the Wyckoff Wave penetrated the resistance drawn at point K, supply had an ample opportunity to assert itself as investors and traders either took profits or exited long-held positions.  This phenomena has been present since the Wyckoff Wave rallied off the spring at point H and first encountered this supply at point I.

There was some absorption from point I to point J.  Point J could’ve been marked as a Last Point of Support. Then there was a rally to point K.  This appeared to be a penetration of the resistance and a Jump Across the Creek.  Instead, supply continued to the present and the Wyckoff Wave entered a new trading range.

Now, we have penetrated the new top of the range, but, so far, supply has not appeared. Are we finally ready to leave the two stage trading range that began in early August?  There are a few important signs, especially a Technometer formation, that say 2012 could be a very good year.

Last week, we discussed the supply situation in detail and analyzed the Optimism – Pessimism Index.  This week’s market action has done nothing to change that analysis.  Now, let’s look at a few more positive indications.

After the last three short term rallies, the Wyckoff Wave has respected the halfway points.  If you look at page 1 of the attached charts, you will see that on the reaction to point P, the Wave respected the halfway point of the rally from points H to K.  The same was true of the reaction from points G to R.  Finally, so far, the Wyckoff Wave has held above the halfway point of the R – S rally.  Respecting halfway points is a significant bullish indication.

So far, with the lack of supply at the top of the trading range, we also find the Wyckoff Wave respecting the halfway points of its rallies.  In addition, since the low at point P, we have also seen higher tops and higher bottoms.

Finally, let’s look at the Technometer. The Technometer is a volume based Wyckoff tool that is extremely helpful, when used with other Wyckoff indicators, in identifying important turning points in the stock market or in individual stocks.  Each stock and index in our Pulse of the Market Charting Service has its own individual Technometer readings.

The Stock Market Institute (SMI) courses and lectures tell us that a Technometer reading over 50 consists of an overbought condition and the market or an individual stock may be ready to react.

Conversely, a reading between 42 and 38 suggests an oversold condition and the market or an individual stock may be ready to rally.  I have seen both numbers presented as an oversold condition.  While I have a tendency to use 38 as an oversold condition, when the Technometer falls below 42 I look very closely at other indicators like the Optimism – Pessimism Index and the Force Index to see how they are relating to the Technometer readings.  Any divergences or inharmonious actions can be extremely helpful in confirming market turning points.

One of the most important uses of the Technometer is in comparing readings with previous highs or previous lows.  For example, if the Technometer reaches a new low, when compared to a previous low, but the index or individual stock does not make a new low, this is an important indication that the market should begin to rally.  The Wyckoff Wave gave us an important example of this just before the beginning of the 2010 – 2011 bull market.

Please look at page 2 of the attached charts. Notice the spring at point G and then the Last Point of Support at point M. At point G, the Technometer reading was 38.11.  This is an oversold condition and preceded the expected rally to point H.  The Wyckoff Wave then rallied to point J and fell back into the creek at point K.  It then rallied to point I and reacted through the bottom of the creek at point M.  We can even draw a short-term down trend channel through point J and L, with a parallel support line at point K.  This was not a bullish scenario.  Count to the down side could have certainly been taken from point L to point F and even to point B.  The economic news was terrible.  The country was in a recession and everything was going wrong.  This had to be a continuation of the bear market of 2008.

Except, look at the Technometer.  As the Wyckoff Wave reacted to point M, the Technometer put in a new low.  It registered 35.66.  This is a dangerously oversold condition.

Now compare points G and point M.  M is substantially higher than point G, yet the Technometer is more oversold.  We know, based on our Wyckoff teachings, that this important indication does not suggest we are approaching a bear market.  It suggests we are going up.

Look what happened. Over the next seven months the Wyckoff Wave gained over 8,000 points. This was a 33 1/3% gain and greatly enhanced the portfolios of wise Wyckoff traders.  I would suspect there were an awful lot of “experts” scrambling to cover their shorts.

Let’s move forward to some recent market action.  At point H, the Wyckoff Wave’s Technometer  reading was 38.04.  The Wave then rallied strongly.  After the highs at point K, the Wave moved sideways and then reacted to point P. Its Technometer reading was a dangerously oversold 33.65.  Compare point P with point H.  We have a lower Technometer reading and a more oversold condition at point P. But point P is quite a bit higher than point H.  I would submit there are some substantial conclusions that can be drawn here.

Finally, let’s take a quick look at the Wyckoff Wave’s Point and Figure chart.  The count from point R (which could be a legitimate Last Point of Support) to point P is 30 on the 100 point figure chart. This gives us a count of 3000 points that can be taken from the low at point P and the high at point R.  This objective is from 30,000 31,400.

If this objective is reached we can then use the second phase of the account, which is from point R to point J.  This is a count of 8,800.  These objectives are from 35,800 to 37,200. This takes us back into the distribution area prior to the 2008 bear market.

While it is important to let the initial phases of counsel work out before looking at maximum objectives, if the Wyckoff Wave achieves all of the its count phases to go back to the August selling climax, we would be looking at a monster rally.

Will 2012 be a banner year for the stock market and the Wyckoff Wave?  Honestly, I don’t know for sure.  However, if we believe the Wyckoff analysis of supply and demand and use the tools in our Wyckoff tool kit, the future looks extremely promising.

Crossing the Creek and the Optimism – Pessimism Index

This week, the Wyckoff Wave attempted to cross the creek, marked by the resistance line at point K, and leave the trading range to the upside.  Will this effort be successful or will we have what Mr. Robert Evans called an Oops?

For those who are not familiar with the Oops story, it is when a stock or index tries to leave the trading range to the upside and fails.  It breaks through the resistance.  Everything looks good and then all of a sudden oops.  The stock or index returns to the trading range or, even worse experiences an upthrust.

Are we leaving the creek and beginning a strong rally or is this an oops?  To find some answers, let’s go back and look at the trading range from a longer-term perspective.  Sometimes, and I have found myself to be guilty of this more often than I care to admit, we find ourselves too involved with the short term action of the Wyckoff Wave for the individual stocks we are following.  When we do that, we often miss the major clues that only seem to come to light when it’s too late.

Many of these excellent clues can be found by studying the Optimism – Pessimism Index, the Force Index and the Technometer.  Until the Wyckoff Pulse of the Market Charting Service software was developed, these excellent tools were not available for individual stocks.  This is because all the calculations were manual and, because of the enormous amount of data that need to be calculated, was impossible to complete in a timely manner.  Now, the software programs allow all the complex calculations to be completed just a few hours after the market’s close.

Let’s start with the Optimism – Pessimism Index.  The O – P Index is simply an index of volume.  Throughout the day, the value from up waves is added to the O – P Index.  The volume from down waves is subtracted.  We look at the volume activity as effort.  The price activity is the results.  As long as the results are matching the effort, everything is in harmony and the existing trend is expected to continue.  If this changes, there is a divergence and the reasons need to be closely examined.

In the beginning of October, the Wyckoff Wave experienced a spring.  This is marked by point H.  It then rallied to point I, and then moved sideways with a low at point J.  A short-term uptrend channel can be drawn on both the vertical line chart and the Optimism – Pessimism Index chart.

The Wyckoff Wave rallied to point K.  It then weakened the short term uptrend channel at point L and broke it when the rally to point M failed to return to the short term uptrend channel.  But, look at the O – P Index.  While the Wyckoff Wave broke the up trend channel on the rally to point M, the O – P Index returned to its uptrend channel on the rally to point M.  While this created a short-term negative divergence, which signaled the eventual reaction to point P, it also showed that the O – P Index was trending stronger than the Wyckoff Wave.

In addition, for short-term traders, the O – P Index helped identify a turning point.  While it returned to the short term uptrend channel at point M, the Optimism – Pessimism Index weakened the channel at point N and broke it at point O.  Look what happened.  Short-term traders who entered the market to the down side at point O reaped some excellent profits in less than two weeks.  Keep this action in mind as it will be significant later in this article.

The Wyckoff Wave then reacted to point B.  There it tested the support line of the new short-term down trend channel that I have marked in red.  The Optimism – Pessimism Index was in harmony with the Wyckoff Wave when compared to points H, L and N.

However, look at the Technometer and the Force Index.  At point P, the Technometer was dangerously oversold at 33.  Technometer readings above 50 are considered overbought.  Technometer readings at 38 or below (some believe 42 and below) are considered oversold.  The Technometer has even more credibility when compared with the Wyckoff Wave or its individual stock.  If at the bottom of a reaction the Technometer is more oversold than a previous low, but the Wyckoff Wave or the individual stock remains higher, we can look for a rally.

Look at points P and H.  The Wyckoff Wave was substantially higher at point P, but the Technometer was at its lowest point since just before the Selling Climax at point X.  The same was true for the Force Index.  The Wyckoff Wave immediately rallied to the top of the trading range.  It then slowly reacted back and saw support just above the halfway point of the rally from point P to point Q.  This Week the Wyckoff Wave has rallied and penetrated the resistance drawn along the high at point K.

What is the Optimism – Pessimism Index telling us about this present rally.  Notice how the O – P has stayed in its short-term uptrend channel.  Unlike the rally to point O, it has stayed in the uptrend channel and is in reasonable harmony with the Wyckoff Wave.  In addition, the Technometer is still in a neutral condition.  These are both positive indications that the rally has a good chance of continuing and can put enough distance between itself and the near edge of the creek to allow it a reasonable chance to back up for a major Last Point of Support.

At this time, the only potential negative is the Force Index which is not as strong as we would like.  However, a positive week can alleviate that condition.

Does this guarantee we are seeing the beginning of the next bull market?  Absolutely not.  Only the market will answer that question.  However, the indications that we are seeing seem to indicate a bullish bias.  The Wyckoff Wave can still have an oops.  However, if we do, it’s going to happen in the next trading day or so.

A few final observations:

As it has progressed through both phases of the trading range, the Wyckoff Wave has behaved more like it is in accumulation than distribution.

We have seen a long slow reaction from point Q to point R.  This reaction respected the halfway point of the previous rally and is a reasonable Last Point of Support.

The Technometer and Force Indexes have given us a strong positive signal at point P.

The Wyckoff Wave and the Optimism – Pessimism Index are both respecting their uptrend channels.

While the dreaded oops can always foil our best laid plans, the Wyckoff price and volume signals couples with our Wyckoff trading tools strongly suggest we are headed up.

The short term trend of the market is up.

The intermediate term trend of the market is still neutral, but that may change.

All of us at Wyckoff Stock Market Institute.Com send our very best holiday greetings and wish each of you and your families a joyous and prosperous New Year.

Corrective Reactions and a Discussion about Gap Openings

This past week, the stock market, as measured by the Wyckoff Wave, experienced a bit of a change in character.  The strong supply that had dominated the moves from points K to L, M to N and O to P has been diminished as we watch the reaction from point Q.

The reaction from points K to L lasted three days and saw relatively widespread and increased volume.  The reaction from point M to N lasted one day and was on wider spread and slightly increased volume.

The Wyckoff Wave was then given a third chance to try out supply and complete a successful reaction back to the creek (the resistance level drawn at point A) for an important Last Point of Support.  This didn’t happen.  Instead the Wyckoff Wave reacted from point O back through the entire creek bed and into the original trading range.  This reaction lasted eight days and, with the exception of the last day, (the day after Thanksgiving was a shortened trading day) was done on good spread and relatively good volume.  At this point, one can conclude the Wyckoff Wave could well return to the trading range and continue it’s sideways movement.

Again, that didn’t happen.  This is one reason why it is intentionally disastrous to draw preconceived conclusions of the market’s short-term change in direction.  It’s also why we love stop orders.

The Wyckoff Wave then reacted on, at best, moderate spread and volume to point Q.  In fact, with the exception of a strong demand a on November 30th, the rally was not particularly promising.  In addition, at the top of the rally the narrowing spread and steady or decreasing volume suggested demand was diminishing.  Were we ready for one more strong reaction back into the trading range?

This is where the change of character began to unfold.  The reaction from point O to point P took eight days.  So far, the reaction from point Q to just above the halfway point of the previous rally has also taken eight days. We are also seeing relatively decreasing volume.  However, its never-ending effort to complicate things, good supply did come into the market on Friday.  While we will discuss this later in this Market Letter, notice that the day’s opening was near the highs of the day and the close near the day’s low.

Regardless, until proven otherwise, we have enough evidence to suggest that, overall, supply is finally starting to dry up.

Several days ago, I drew a support line on the chart between points H and P.  I was a bit skeptical when I did this as I was quite uncomfortable with the nature of the reaction to point P and the extremely low volume was  primarily due to the shortened day after Thanksgiving trading day.  However, I was curious to see how the Wyckoff Wave would act as it approached this support line in the future.

The Wyckoff Wave is now approaching three important support levels.
1.  The halfway point of the rally from points P – Q.
2.  The creek or resistance line drawn from point A.
3.  The support line drawn through points H and P.

If the Wyckoff Wave respects these important support levels and does so on reduced spread and volume, we could well see the completion of an important Last Point of Support. In the days to come, the Technometer will most probably send us an important timing clue. As our daily Pulse of the Market Report subscribers already know, the Optimism-Pessimism Index and the Trend Barometer are already dropping some interesting clues.

If it does not, the Wave will most probably return to the trading range and begin a new phase of sideways movement.

A Discussion of Gap Openings

Over the past few weeks, I have received several e-mails inquiring about gap openings.  Many students were not familiar with how they were treated and were curious as to where they could find more information in their course text.

I did not learn about gap openings from the text.  In fact, I honestly don’t know if the subject is included in the basic course.  I learned about gap openings and how they were treated from Craig Schroeder.  Craig, until his untimely passing in 2009 was, with Gary Schuber, the owner of Stock Market Institute (SMI).  Craig began his career with SMI in Chicago, under Mr. Robert Evans.  He read the ticker tape for Mr. Evans and helped compile his charts.  Yes, before computers there actually was a ticker tape machine that spewed out stock prices in a special code and charts were market-up manually.

Although Gap Openings were not nearly as common then as they are today, Mr. Evans was very aware of them and taught Craig how to interpret them.  I am passing along his teachings on this important subject.

When a stock or an index experiences a gap opening, the actual gap is ignored when analyzing the day’s action.  The Wyckoff Student is only interested in the difference between the day’s actual high and its low as shown on the vertical line chart.  If the actual gap is included in the day’s analysis, an incorrect conclusion can be drawn.

When analyzing the market’s action for a particular day, it is helpful to compare it to what happened on the previous day.  Just because a stock or index rallies on a particular day does not mean that demand is always present.  Let’s look at the possibilities when comparing a day’s action to the previous day.
1.  The rally is on increased spread and volume.  That means demand is present.
2.  The rally is on increased spread and decreased volume.  That suggests a lack of supply.
3.  The rally is on decreased spread and volume.  This suggests a lack of demand.
4.  The rally is on decreased spread and increased volume.  This is an indication that supply is coming into the market.

On a reaction, conditions are reversed.
1.  The reaction is on increased spread and volume.  This means supply is present.
2.  The reaction is on increased spread and decreased volume.  This suggests a lack of demand.
3.  The reaction is on decreased spread and volume.  This suggests a lack of supply.
4.  The reaction is on decreased spread and increased volume.  This is an indication of demand is coming into the market.

As you can see, if we include the gap in analyzing a particular day our conclusions could change.  Let’s look at a couple of charts and discuss a few examples.

On the chart of the Wyckoff Wave, I have marked 4 gap openings with blue arrows.  The first is just below point K.  This turned out to be a very important example of how a gap opening can mislead the trader.  The final day of the rally to point K was on increased volume.  In fact, it was the highest since point F.  A cursory look at this would suggest that the Wyckoff Wave had a successful one-day back up the Creek and was quickly leading the trading range to the up side.  However, if we look at the spread between the day’s actual high and low, we will see it was slightly narrower.  Not much, but narrower.  That, coupled with the large increase in volume, suggests supply was more active than demand.  That conclusion was immediately confirmed as the Wyckoff Wave reacted to point L.

The next blue arrow is the day after point P.  The Wyckoff Wave had fallen through the Creek, but then rallied on increased volume. Again, a cursory look would have suggested good demand had come into the market. However, if the gap is removed, we actually see reduced spread and increased volume.  This suggests the presence of supply.  Beginning a rally with some supply still present, suggests the rally will not be either strong or long.  That turned out to be correct as the rally only lasted five days and was unable to penetrate the resistance at point K.

There are some days when the gap opening is irrelevant.  Two days later, we saw a huge gap opening to the upside.  However, notice the actual opening of the Wyckoff Wave.  It was at the top of the day’s price spread.  During the day, the Wave reacted strongly, but did rally and closed at the top of a wider price spread.  While the day’s action must be called decent demand, the actual opening showed us that supply did come into the Wyckoff Wave.  This was the last positive day of the rally. By correctly analyzing the day’s action, we did see that some supply was beginning to come into the market.

The final example is found on last Friday’s action.  Here, there was a large gap opening to the upside and the Wyckoff Wave spent most of the day reacting.  Volume increased. The Wyckoff Wave closed two points lower than it did on Thursday.  The price spread increased.  Two points on an index at 29,000 is an infinitesimal difference.  The Wyckoff Wave easily could have closed two points higher, or 10 points higher, or 50 points higher.  If so, the day’s action could have easily been interpreted as demand (increased spread and volume).  However, if the gap opening is eliminated and we begin the day where the Wave actually opened, it is very easy to see that supply was the dominant force in the day’s action.

Ever since Craig Schroeder shared this bit of information with me, it has helped me to better interpret indexes and individual stocks and reduced my mistakes.  It is important to remember that when comparing the day’s action to the previous day, we are not anticipating an instant change in direction, but getting a better feel for the strength or weakness of a particular trend.

Overhanging supply and the news

No one can dispute that the financial problems plaguing the European Community are not having an impact on the American stock market.  It has become a major topic of discussion among investors and traders.  Each morning, everyone checks the S&P futures before having their first cup of coffee.

However, Wyckoff traders are taught to ignore the news.  They know that news doesn’t change the market’s real destination, it just gets it there quicker. Is this teaching wrong?  Have the advances in communication and the 24-hour news cycle changed the market’s from the original Wyckoff perspective?  Some think so.  Respectfully, I do not.

Perhaps it is not news that is causing some turmoil, but the large gap openings that occur based on a particular development in the European community.  These gap openings can cause investors and traders to misread today’s market action.

For example, recently the Wyckoff Wave had a gap opening of over 700 points.  The same day the S&P 500 had a gap opening of over 30 points.  Both indexes closed near the highs of the day on increased volume. In addition, the price difference between the day’s close and the previous day’s close was almost 1000 points on the Wyckoff Wave and over 35 points on the S&P 500.

A casual look at the day’s action could cause one to conclude strong demand was present and the market was going to continue higher.  That was not the case. Gap openings don’t count when analyzing a price spread.  What does, is the difference between the actual high price and the actual low price.  In this case, on both indexes, the price spread was narrower than the previous day.  This suggests that supply came into the market.  While everyone else was getting excited, the savvy Wyckoff trader saw problems.

Three days later, with the help of a few more gap opening to the down side, the Wyckoff Wave has reacted and lost over 1500 points.  You can see this by looking at the action around point K on the attached chart.

In my opinion, the news impacts markets openings more than it does during the trading day.  While this makes it more difficult for the short-term trader to enter and exit the market, it should not impact market analysis.

I would suggest that the amount of overhanging supply, that was discussed in the last market letter, has much more to do with the condition of the market than news from Europe.

How the stock market, as represented by the Wyckoff Wave, handles this overhanging supply will tell us a great deal more about its future direction than the news.
The Wyckoff Wave broke the long-term uptrend channel, that is seen on the left side of the attached chart and reacted strongly to a selling climax at point X.  This began a new trading range, which could be easier accumulation or distribution.  However the trading range itself can present several clues.

The first significant clue was the spring at point H.  This suggests the trading range was accumulation and the market is going to advance.

The market rallied strongly to point I.  It then moved sideways for several days.  It was unable to rally through the resistance.  It was also unable to react back into the trading range.  It was experiencing absorption.  A portion of the tremendous amount of overhanging supply, not only from earlier this year, but from the bear market of 2008 (people trying to get out almost even or with a small loss).  This is a lot of supply and it needs to be placed in strong hands before the market can advance.

The market finally broke through the resistance to the upside.  Again, the rally was stopped as more supply came in at point K.  At this point, three things could’ve happened:
1.  This could’ve been a major upthrust and the Wyckoff Wave could have reacted strongly back into the trading range and beyond.  There was a potential for a continuation of the bear market.  If one paid attention to the news, that was not an unthinkable scenario.
2.  The Wyckoff Wave could have backed up to the creek.  The creek, which is drawn in blue shows the near bank at point A and the far bank drawn through point E.  A normal backup would be completed on reduced spread and volume.
3.  Neither of these would happen and the Wyckoff Wave would simply establish a new trading range and begin to move sideways.  This would also be another phase of the trading range that began at point X.

The reaction from point K was on widespread and good volume.  Was the upthrust scenario coming to fruition?  In fact it wasn’t.  The Wyckoff Wave rallied, reacted rallied again and then started the fall back into the creek.  In fact it went slightly past the creek and briefly returned to the trading range.  It then rallied all the way to point G.

If you look at the chart you will see that a great deal of supply was present.  Normally, this amount of supply would drive the Wyckoff Wave at least to the bottom of the trading range.  This didn’t happen.  This would suggest more and more supplies being dumped, but is being accepted by professional or strong hands.  The fact that the supply is being accepted at these levels is, in my opinion, an encouraging sign that this trading range is accumulation. This will be confirmed, one way or the other, by the ending action.

Now the Wyckoff Wave has again rallied to test the highs at point K.  As it approached point Q, we saw decreased spread and slightly decreased volume.  We also saw the Wave’s inability to penetrate the resistance level on three consecutive days.  The reduced spread and slightly reduced volume suggested a general lack of demand and that the Wyckoff Wave would react towards the bottom of the new trading range.

Then, last Thursday and Friday there was a minor change of character.  On Thursday, we saw wider spread and increased volume to the down side.  Friday brought a complete reversal.  Increased spread and volume to the upside.  This wider spread and good volume are indications of our old friend absorption.  Again, more stock is being dumped by weak hands.  It is, however, being taken in.  This is one more indication that we are seeing a period of accumulation.

The problem with absorption is that one doesn’t know when it is complete.  This makes things tricky, especially for short-term swing traders.

As the market rallied to point Q, the narrower spread suggested there was a short-term opportunity to the down side.  Short-term traders were delighted on Thursday.  Disappointed on Friday.  So, what’s going to happen on Monday?

The Wyckoff Wave could upthrust the resistance.  It could react and continue adsorption.  It could jump the resistance and move into new high ground.  It could react back to the bottom of the new trading range.

In the interest of full disclosure, I am one of those short-term traders that is sitting on a small profit after Friday’s close.  To be honest, I haven’t a clue what the market is going to do on Monday.  Of the 12 stocks that make up the Wyckoff Wave, 4 look like they are prepared to advance, 4 look like they are prepared to react and 4 look like they are prepared to go sideways. Not much help there.

While I would like to see the market react, it really doesn’t matter. If the market advances, I have established a stop order that will close my position with a small profit.  If the market declines I will simply move my stop order.  The key is to plan ahead.  To anticipate a market move in either direction and established specific plans for each scenario. Then, maintain the necessary discipline to carry out your plan.

For short-term swing traders, it’s never about how much you make, it’s about how much you don’t lose.

Where Do We Go From Here?

In his excellent, but little-known, book “Where Do We Go From Year”, Dr. Martin Luther King Jr. described his blueprint for continuing the civil rights movement after the signing of the 1964 Civil Rights Act.  He often referred to the history of the movement and it must be understood as it often repeats itself, although on slightly different ways.

The same is true of the stock market.  Sometimes we are so focused on what happened yesterday and may happen tomorrow that we miss the little signs that tell us where the market is really headed.

Wyckoff students can find many of these signs in the Wyckoff tool kit.  While the Technometer and Force Indexes are more short-term, the Optimism – Pessimism Index can generate indicators, sometimes months or even years in advance that can warn us of impending market changes.

As many know, Mr. Wyckoff introduced volume studies to technical trading techniques.  The Optimism – Pessimism Index is a study of volume and how it compares to the prices you see on the vertical line chart.

Before commenting on today’s market, I would like to review the two previous significant declines.  They were, of course, the bear market of 2008 – 2009 and this year’s reaction.

The 2008 – 2009 bear market was the largest in recent history.  Many, many people lost a great deal of money and its effects are still impacting today’s stock market.

By early 2011, the market’s rally off the bottom nicely exceeded the halfway point of the bear market.  Some investors saw an opportunity to recoup much of their losses and began to do so.  Needless to say this helped cause this summer’s reaction.  The market then climaxed, began to move sideways and then tried to leave the trading range to the upside.

What is going to happen next?  Let’s go back and look at the Wyckoff Wave’s Optimism – Pessimism Index and compare it to the Wyckoff Wave.  Perhaps we can learn some lessons from history.

In late 2004, the O – P Index was significantly stronger than the Wyckoff Wave.  Over the next four years, the O – P continued to lead the Wave, but its relative strength was decreasing.  Wyckoff traders should have been aware of this, but not concerned enough to close positions.

Then things changed.  In November of 2007, the Wyckoff Wave reached its high.  The Wave then reacted, in what could be considered a normal corrective reaction.  In early 2008 the Wave attempted to rally again, but could only reach 35,550.  However, the Optimism – Pessimism Index moved into new high ground.  The O – P was not leading the Wyckoff Wave, it was presenting a major negative inharmonious action.  This was an important change of character.  Soon after that the market collapsed and the Wyckoff Wave reacted all the way down to 14,450.  Interestingly, a count on the Point and Figure chart from the last point of supply on the rally back to the ice, gave an objective of 15,000.  Not only had the Wyckoff Wave anticipated the bear market, it had also provided the correct objective. As the market prepared to decline, the Optimism – Pessimism Index was providing clues to its demise. Unfortunately, this data is not in our database and the numbers were taken from old hand-drawn charts.

Let’s move ahead to this year.  A look at the weekly chart of the Wyckoff Wave, which is on page one of the attached file, shows the Wave reached a high at point G.  This was in June, 2011.  If you go back and look at the Optimism – Pessimism Index and compare it to point E, another change in character is present.  Notice that the O – P Index, which was advancing strongly with the Wave, suddenly became weaker.  At point E, the O – P was 61,963.  At point G, the O – P was only at 61,921.  This is a negative divergence.  The effort, as represented by the O – P, certainly did not match the results of the Wyckoff Wave as it moved into new high ground. This is a warning sign and it was given three months before the summer’s decline.

There was still more to come.  The Wyckoff Wave then reacted to point N and rallied to point S.  Notice that S is lower than the highs at point G.  Yet the O – P moved into new high ground at 61,980.  Not only is this another negative divergence, but it is now what I call a double reversal.  There were two important negative divergences.  The first presented a weaker O – P.  The second presented a weaker Wyckoff Wave.  When these appear, believe me, trouble lies ahead.

Of course, it did.  The Wyckoff Wave reacted over 20%, climax and began a new trading range.

While history lessons can sometimes be boring, the Optimism – Pessimism Index is an important Wyckoff tool when looking for important changes in direction.

Let’s look forward to today’s market.  What does the Optimism – Pessimism Index tell us about the Wyckoff Wave’s future direction. For this, let’s move to the daily chart, which is  the second page of the attachment.

After the Selling Climax at point X, the Wyckoff Wave established the top of a new trading range at point A. The O – P Index was at 61,213.  A few months later, the Wave jumped the resistance and established a high at point K.  The O – P Index was now at 61,852.  The O – P Index is in harmony with the Wyckoff Wave and, so far, all is well.

However, the Wyckoff Wave was not ready to begin a new intermediate term uptrend.  While it backed up to the resistance at point L, it did so on good supply.  The subsequent rally to M was not particularly strong.  However, look at the O – P Index.  It moved into new high ground at 61,950.  This is a short-term negative divergence and a caution sign.  Something is happening.  It may have longer-term ramifications or it may not.  We should, however, pay attention.

After a one-day reaction to point M, the Wyckoff Wave rallied to point L. While points M and O are at basically the same level, the O – P Index again moved higher.  Our caution light continues to flash.

The Wave then reacted back down into the trading range (another negative indication) to point P.  While the Wave and O–P Index are in harmony when compared to point N, there is a minor positive divergence when compared to point J.

The Wyckoff Wave then rallied back to test the highs at point K.  On Friday, it was turned back at the resistance line and closed near the day’s lows.  What about the O – P Index?

When compared to point K, everything is basically in harmony.  However, when compared to points M and O, we see another double-reversal. All of a sudden, the Wyckoff Wave is higher an the O – P Index is now lower.  This negative divergence suggests we are getting more results than effort.

Does this mean we are headed for a new bear market?  Candidly, I doubt that is the case.  The examples given above were all over longer periods of time.  Just like short-term and intermediate term trend channels, there are short-term and intermediate term divergences.  As the O – P Index and the Wyckoff Wave are in relative harmony when compared to point K, I would need more intermediate-term evidence before suggesting a major decline is on the horizon.  However, we still need to watch the faithful O-P Index for important clues.

It is also important to understand the emotional aspects of the market and the transfer of shares from weak hands to strong hands.

As mentioned earlier, many people lost a great deal of money in the bear market of 2008.  There is still a great deal of overhanging supply that needs to be taken back in and acquired by stronger professional hands who are accumulating shares for the next move to the upside.  We are right in the middle of the halfway correction of the bear market, which is a classic point for people to get out, but not lose everything.

The short term divergences tell us that while the market may react, it is not yet ready for a major move.  Two things can happen.  We may see the market react into the trading range and even test the lows at point H.

We may also see a new phase of the trading range with resistance at point K and support at point P.  When a stock jumps the resistance (creek) and then is unable to back up for a major Last Point of Supply, it is not uncommon for a new phase of a trading range to develop.

If we are in a period of accumulation, we will need to see the market become duller.  That will mean fewer gap openings and more narrower spreads.  We will also see more decreased spread and volume on reactions.

While short-term traders may investigate opportunities to the down side, this is probably not a good entry point for intermediate traders to the upside.

The short term trend of the market is still down, but weakened.
The intermediate term trend of the market is neutral.

Don’t Prejudge the Market

Ever since I began writing my Weekly Market Reports, to post on the blog, and my daily Pulse of the Market Reports for charting service subscribers, I have received many e-mails about my comments and observations.

While I sincerely appreciate the kind words, I am most interested and impressed by the observations of other Wyckoff students and their take on recent market action and its future direction.

Many of these students offer, using excellent Wyckoff techniques, their own opinions on the stock market.  I have received e-mails justifying why the market is going to advance and why the market is going to decline.  Both positions are well laid out and well-documented.

To be honest, all I know is that the market is in a trading range and before we can determine its future intermediate term trend we need to see ending action and a successful test of that ending action.

I worry that students can come to a predetermined conclusion as to the market’s future direction and then look at market action in a way that only justifies their original decision.  I would suggest that this is a great opportunity to miss market moves.  Even worse, it may cause us to take a short
position, just when the market starts to rally.  Or, vice versa.  I know, because I’ve been there and done that.

One way to avoid this trap is to always look for opportunities, both to the upside and downside.  When the market for an individual stock is rallying, look for both the positives and negatives.  The positives are that the rally will continue.  The negatives are that we may have a turning point and the market will react.  When we look at both, one usually stands out and makes our decision easier.  In addition, we don’t  become overly bullish or bearish.

There are also a few important rules that successful traders and investors should always follow.
1.  Decide if your trade is going to be a short-term (swing) trade or a longer-term intermediate trade.
2.  Always, always trade within the trend.  The position sheet tells us that Trend 1 is a short-term uptrend.  Trend 2 means a long-term uptrend.  Trend 3 is a short-term down trend.  Trend 4 is a long-term downtrend.  Indexes or stocks can also be in a short-term or long-term neutral trends.  As long as your trade stays within the trend lines, you are in good shape.  When they weaken the trend, the short-term trader should probably close the position.  When the trend is broken, the intermediate-term trader should probably close the position.
3.  Don’t anticipate a change in the trend.  It is better to get in a day or so late and get out a day or so early then to enter a trade and have the trade go against you.  Exact turning points are usually only obvious after they happen.

To help clarify this, let’s go back and review the trading range that started in August of this year.  The Wyckoff Wave had reacted strongly from its recent highs and we saw a buying climax at point X.  There was then an automatic rally to point Y and a successful secondary test at point Z.  At that point it is reasonable to conclude the downtrend has stopped and we are going to move sideways for a while.  Or our we?

The stock market, as represented by the Wyckoff Wave rallied to point A. By definition, point A is an upthrust.  There was a shortening of spread, an increase of volume and the following day the close was back to its recent average range of closes. But was this ending action or was the Wyckoff Wave simply establishing a resistance point at the top of a trading range?

Short-term traders certainly had opportunities to the down side.  The Wave had a sharp three-day reaction and then rallied to test the potential upthrust at point C.  There was then a brief reaction to D.  However, potential trouble was waiting.  Notice that demand came in at point D and the Wave closed at the top of the price spread on increased volume.  More importantly, it was unable to reach the supply line of the short term downtrend channel. This put the trend in jeopardy and, sure enough, two days later the trend was broken.  The short term or swing traders should have closed their trades at the first sign of trouble.

That does not mean that the upthrust was not an upthrust.  It only means that it may be tested again and that test will either succeed or fail.  The short-term trend is changed to neutral and we let the market tell us what is coming next.

After soundly breaking the trend on wide price spread, the Wyckoff Wave rallies poorly to point E.  It ran into good resistance at the line drawn from the top of the automatic rally and did so on reduced spread and volume when compared to the upthrust at point A.  This appears to be a more valid test of the upthrust, especially when we see the close at point E.  There was reduced spread and volume and the Wave had absolutely no interest in attempting to continue the rally.

Again, the short term traders have another opportunity to the down side.  The Wyckoff Wave then reacted sharply to the bottom of the trading range at point F.  This is also at the support line of the new short-term down trend channel I have drawn in purple.  There is then a three-day rally to point G.  Notice that the rally does not reach the supply line.  This is considered weakness and an indication that the next reaction could penetrate the bottom of the range for a major Sign Of Weakness (SOW).

However, if we had prejudged that, we would have made a major mistake and missed a nice opportunity to the upside.

The Wyckoff Wave did in fact penetrate the bottom of the trading range.  But then, a tremendous amount of demand came into the market.  Instead of a Fall Through The Ice (SOW) we had a spring.  Just like that the market turned around and rallied strongly.  If they were not alert and paying attention, the shorts could’ve lost all or a large portion of their initial profits.

If they were paying attention, the shorts could have closed their positions on the spring and opened new short-term positions to the upside.  Buying on a spring is a tried-and-true Wyckoff strategy.

Now we have seen both a spring and upthrust. As it turns out, neither one was the ending action the intermediate-term traders were looking for to take longer-term positions in the market.

The Wyckoff Wave rallied strongly to point I and then moved sideways to point J.  It was absorbing supply at the top of the range and we can draw a short-term uptrend channel with a supply line point H – J and a parallel support line through point I.

Have we seen a sign of strength to point I and a last point of support at point J?  It is not an unreasonable conclusion.  However, that conclusion needed to be confirmed by a strong jump across the creek (the resistance at the top of the range).

Look what happened.  The Wyckoff Wave certainly penetrated the resistance and initially did so on good spread and volume.  But look at how the Wave moved within the uptrend channel.  It was almost immediately weakened and even after the strong rally to point K, it was unable to reach the supply line of the uptrend channel.  The strong spread and volume at point K was a very positive indication that the rally might continue.  Even though the Technometer was in an overbought condition, the Optimism – Pessimism Index was leading the Wave and things still looked positive to the upside.  However, as the uptrend channel had just recently been weakened, the Wyckoff Wave had to “go and go now”.  It didn’t do that and two days later again weakened the up trend channel as it reacted two point L.

However, the bulls still had an opportunity.  It is not unreasonable to call the move from point H to point K a major sign of strength and to look for a reaction back toward the creek (resistance/support), as drawn in blue on the attached chart.  This reaction, if done on reduced spread and volume could become an important Last Point Of Support (LPS).

However, the good Wyckoff student would also be looking at a more bearish scenario.  Conclusion should not be drawn, but observations should be made.

The Wyckoff Wave reacted sharply to point L.  This was certainly not on reduced spread and volume and one needed to pay great attention to the bearish scenario.  However, the Wave saw support right at the top edge of the creek and it was enough to allow a weak rally to point M and a second chance for a successful backup.

The bears should note that point M is a lower than point K and that the rally was of poor quality. We can now draw a new short-term down trend channel with the supply line points K – M and a parallel support line at point L.  There was then a one-day reaction back to point N.  Even though the reaction was on good spread and volume, it did hold above point L. There was another short rally back to point O. While there was no follow-through, the supply line of the short term downtrend channel was weakened.  In addition, the reaction to point N did not reach the support line.

We are now at a most interesting potential turning point.  While the bulls can point to the inability of the Wave to reach the support line at point N and the weakening of the supply line at point O, the bears can answer with lower tops and supply on the reactions and rallies of poor quality.  In addition, there was no follow-through to the upside at point O.

This would suggest that the Wyckoff Wave will react and it is reasonable for the bears to take short-term positions to the down side.  The bulls have one last chance for a reaction on reduced spread and volume for a Last Point of Support.

Both scenarios are plausible and both should be strongly considered.  Bulls should have looked for intermediate-term opportunities to the upside, but not taken positions until the LPS was confirmed.  Bears could take short-term short positions, but carefully watch the spread and volume.

As it turned out, the Wyckoff Wave fell back into the creek and the trading range should be continuing with a new phase.

This little adventure through the trading range shows us that we need to always consider both sides of the argument and never trade against the trend.

The Wyckoff Wave: Relative Strength and the Optimism – Pessimism Index

One of the most important Wyckoff techniques is breaking down an index’s or stock’s daily action into individual up waves and down waves.  This allows us to determine how much of the day’s volume is demand and how much is supply.  This information is then transferred to the Optimism – Pessimism Index (O – P).

The O – P is a continuing number. Each time there is an up wave, the wave’s volume is added to its O – P.  Conversely, volume is subtracted after a down wave.  The actual number portrayed in the Optimism – Pessimism Index isn’t important.  The significance is when the relative numbers are compared with the highs and lows from the vertical line charts.

The Optimism – Pessimism Index represents effort.  The prices on the vertical line chart represent results.  The trick is to compare the O – P’s effort and the vertical line chart’s results with previous highs and lows.  If they are not in harmony, these negative divergences can help identify possible turning points.

The O – P can often lead the index or stock price during longer-term advances. There is a tendency for the effort shown by the O – P to pull the stock along with it as it advances.  This action should not be confused with a negative divergence which can suggest a possible turning point.

When the Optimism – Pessimism Index is unable to keep pace with its vertical line chart partner, we should pay close attention and look for a possible change in direction.  A classic example of this is on the attached weekly chart of the Wyckoff Wave.

After the bear market of 2008, the Wyckoff Wave began a long advance to the highs of 2011.  The long-term uptrend channel is drawn on the weekly chart.  At point E, the Wyckoff Wave moved into an overbought position relative to the uptrend.  Note the level of its Optimism – Pessimism Index.  It is 61,963.

The Wave then reacted to point F and rallied to a new high at point G.  However, for the first time, the O – P did not keep up with the Wyckoff Wave.  At point G the O – P Index was only 61,921.  The effort was not matching results.  This negative divergence suggests that even though the Wyckoff Wave appears strong, trouble lies ahead.

Trouble appeared in lower tops at points S and U. In addition the negative divergences continued. The O-P at point S was 61,980 compared with the 61,921 at point G . Then we saw huge reaction, in a short period of time, to point X.  This was the “bear market” of 2011.  While the decline did not begin until August, the Optimism – Pessimism Index gave us an early warning signal in late April.

The reaction ended in early August with a Selling Climax at point X.  Notice point X on the
O – P Index chart.  The Wyckoff Wave rallied to point Y and then reacted to point Z.  Point Z held above point X.  If we look at the O – P chart, notice that at point Z the O – P has gone into new low ground.  This is a positive divergence and the Wyckoff Wave rallied.  Again, the Optimism – Pessimism Index gave us a signal that the market was turning upward.

An even more important signal came when the Wyckoff Wave sprung the trading range at point H.  The Wave moved into new low ground, but the Optimism – Pessimism Index was substantially higher.  In fact it was consistently showing higher tops and higher bottoms.  Another fantastic negative divergence and the Wyckoff Wave rallied strongly to point K.  This certainly could be called a major Sign of Strength (SOS).  Now, we just had to wait for a nice back up to the Creek for a major Last Point of Support (LPS) and we were off to the races.

However, good supply came into the market as the Wyckoff Wave reacted off point K.  There was a weak rally to point M.  Point M held below point K.  But look at the O – P chart.  We had another negative divergence as the O – P moved higher than at point K and the Wyckoff Wave did not.  The same thing happened on the rally from point N to point O.

These negative divergences with the Optimism – Pessimism Index suggested this would not be a traditional backup.  While there was still a chance for the Wyckoff Wave to continue to absorb supply, time was certainly growing short.  The tremendous effort being put in by the O – P Index was not being matched by the Wyckoff Wave.

As we have seen in recent days, supply has overcome the demand and the negative indications presented by the Optimism – Pessimism Index are coming to fruition.

Now it will be important to watch the O – P Index as the Wyckoff Wave reacts back into the trading range.  The O – P Index has been stronger than the Wyckoff Wave since the trading range began back in August.  It will be interesting to see how it compares with the Wyckoff Wave as it tests point J and possibly the bottom of the trading range.

I have found from experience that while the Optimism – Pessimism Index is not a mechanical timing tool for short-term traders, it is excellent in predicting market turns. It is an extremely important tool for the Wyckoff trader.

As it appears that the Wyckoff Wave will not put in a Last Point of Support and will return to the trading range, what lies ahead?  Are we seeing the beginning of a new bear market, or will the Wyckoff Wave simply return to the trading range and begin a third phase.  Phase 1 is from point X to point H and phase 2 is from point K to point O.  While the jury is still out, the trading range scenario appears to be the most probable option.  The relative strength of the O – P Index can well create some positive divergences on the reaction and an oversold Technometer should slow down or stop a steep decline.

The short term trend of the market is still down.
The intermediate term trend of the market remains neutral.

News and the Stock Market

This Tuesday, the stock market opened higher, and then reacted. In the afternoon, it rallied strongly and closed near the day’s high. The “expert news analysts” attributed the rally to the news that Italian Prime Minister Silvio Berlusconi would be resigning and that this was positive news for the pending Italian financial crisis.

The following morning, the market had a huge gap opening to the down side.  It continued to react during the day and closed just off the day’s lows.  Again, the “experts” weighed in.  Their rationale was that the market was terribly concerned about the Italian financial situation.

Now I’m not the smartest bulb on the chandelier, but it’s difficult to understand why the same news could cause a rally one-day and less than 24 hours later a large market reaction.

I would humbly suggest that the answer is simply ignore the news when analyzing the stock market.  This is hard to do, but is one of the core Wyckoff principles.  The news can be a catalyst that will take the market where it was already going to go.  It will just get there faster.

I read the newspaper every day.  I am very aware and very concerned about the financial situation in Europe and the United States.  However, when I analyze individual stocks or the markets in general, I leave my feelings about the world financial situation at the door.  They do not and cannot factor into my decision-making when selecting potential trades.

The news does create a specific problem for market traders.  That is, those pesky gap openings.  Years ago, markets basically opened where they closed the previous day and in entry and exit points were a bit simpler.  Today, after a student spends am evening doing some analysis, a 20 point gap opening in the S&P 500 can raise havoc with his or her trading strategies.

In the last 15 trading days, the Wyckoff Wave has seen 15 gap openings.  Seven of those have been significant.  You can see them on the attached chart. Short term day and swing traders, who have done their Wyckoff analysis the previous evening, wake up to a 20 point gap in the S&P futures.  It is difficult to chase entry points.  It is often better to wait for the next opportunity.

Intermediate and longer term traders should be analyzing the market to determine the direction of the next significant trend.  The first question to answer is: Is the market behaving in a bullish or bearish manner?

Let’s look at the market from a long-term perspective.  In 2008 the Wyckoff Wave peaked at 39,960.  A few months later, at the end of the bear market, it had reacted all the way back to 14,960. An awful lot of people lost an awful lot of money.  The great deal of this money was in paper profits that turned into paper losses.

Since the end of the bear market, the Wyckoff Wave went through a period of accumulation and then rallied to 31,038, which is marked as point G on the attached chart.

It then reacted to point X, where it experienced a buying climax that stopped the reaction.  The low at point X was 25,033.  This is just above the halfway point of the rally from the 2008 lows to point G.  This would be considered a normal reaction in an uptrend.

The Wyckoff Wave then moved sideways in a trading range.  It sprung that range at point H.  It rallied to point I and then went through some absorption before it rallied strongly out of the trading range to point K.  Since then the Wyckoff Wave has not behaved as many of us would like.

At first, it reacted strongly back to the creek or the resistance/support line drawn at point A. This would lead us to expect the Wave would react back into the trading range and continue its horizontal movement.

It didn’t do that.  Instead, there was a weak five day rally to point M.  It seemed like more good news for the bears as:
A) the reaction to point L was not done on reduced spread and volume, so we could not have seen a last point of support.
B) the subsequent rally to point M was of poor quality and put in a lower top than at point K.

The following day, the strong reaction seemed to vindicate the bear’s position.  But there was no follow-through, although Thursday’s action, a rally on decreased spread and increased volume, suggested supply was still present.  Then on Friday, a large gap opening and a quick follow-through took the Wave to its highs for the day and was testing the supply line of the short term down trend and point M.

While the Wyckoff Wave has not put in a classical last point of support, it is certainly not acting like it is going to be reacting strongly in the near future.  Reactions and bear markets happen quickly and decisively. Rallies and bull markets have a tendency to wander a bit and take more time.

Please look at the following markups on the attached chart.  Notice that the halfway point of the 2008 bear market is right around the top of the trading range.  Also notice that it is in the same area as the halfway point of the reaction from point G to point X.

In this area we can certainly expect two types of investors to lead the market.  There are still many investors who lost a great deal of money in the bear market of 2008.  They hung on and saw a fair portion of their profits recovered as the market rallied to point G.  All of a sudden, last summer’s reaction “stole” a portion of these gains.  When the market rallied up to and past the halfway point of both the summer’s reaction and the 2008 bear market, they saw a wonderful opportunity to exit. And they did.

However, stronger hands are quietly taking in the supply.  This is why we saw the absorption at the top of the trading range and probably why we are seeing the up-and-down movement we have experienced for the last two weeks.  The market is quietly moving from weak hands to strong hands.

Will the market rally tomorrow and take out the highs at point K? Or, will we see another reaction and a more traditional last point of support?  Either one is possible.  However, it would appear the markets are preparing for a strong move to the upside.

Did the Wyckoff Wave back up to the Creek?

In last week’s Market Letter, I suggested that the Wyckoff Wave would be backing up to the Creek.  A successful back up would be an important last point of support (LPS) and the beginning of the markup phase.

This Tuesday, November 1st, the Wave reacted to point L.  It then has rallied in a fairly unimpressive manner.  Was the reaction to point L really a last point of support?

Before that discussion, let’s review gap openings and how they are treated in Wyckoff methodology.

Gap openings to the up side or to the down side are usually a result of either fear or greed that has developed since the previous day’s close.  They are often driven by news and in many cases automatically corrected during the trading day.

Wyckoff students are taught to ignore the gap. In other words, the day’s price spread calculation in a stock or index does not start at the previous day’s close, but at the day’s opening.  The gap is not included when the price spread and volume are analyzed to determine whether the days action was predominantly demand, supply, lack of demand or lack of supply.  Unless we adhere to that rule we can totally misread the day’s market action.

With that in mind, let’s return to the reaction from point K.  Last Friday, there was a gap opening to the down side and the subsequent action resulted in reduced spread and volume as the Wyckoff Wave rallied after the opening.  This suggests a lack of demand.

On Monday, the Wyckoff Wave reacted on increased spread and decreased volume.  This suggests a lack of demand.  As the week went on, we would then expect to see reduced spread and volume as supply dried up when the Wyckoff Wave backed up to the creek.  That didn’t happen.

On Tuesday, the Wyckoff Wave had a huge gap opening to the down side.  In fact, it was the low for the day.  It then rallied during the morning hours and, in the afternoon, reacted back to close near the days lows.  Tuesday’s price spread was less than Monday’s, but by only 36 points.  While arguments can be made that the day was dominated by supply, I would suggest it was a bit of a Mexican standoff.  The real point is that whether or not supply or demand was present, supply was certainly not drying up.  Based on that, it is very difficult to call point L a successful backup to the creek.

It appears as though demand was at least the temporary winner as the Wyckoff Wave rallied on both Wednesday and Thursday.  So far, the rally has not been overly impressive.  Wednesday gave us reduced spread and volume, suggesting a lack of demand.  While spread and volume increased on Thursday, and the Wave closed near the top of its price spread, the relative volume was not particularly strong.

If there had been a successful backup and major last point of support, the Wyckoff Wave would have been expected to rally strongly and begin the markup phase.  The poor quality of the rally was again demonstrated on Friday when the Wyckoff Wave experienced a gap opening to the down side, reacted to the day’s lows and rallied to close near the gap opening and the highs of the day.  The day’s action, which was on reduced spread and volume, can be interpreted as a lack of supply.  Again, like on Tuesday, some supply came in the early part of the day and then there was a long slow rally to the close.  Therefore, an argument can be made that the day’s action may have been a lack of demand.  I would suggest that the inability of the Wyckoff Wave to continue to rally strongly and attempt to return to the short term uptrend channel is a concern.

Notice that the rally to point K was unable to reach the supply line of the short term uptrend channel.  If the Wyckoff Wave is unable to rally past point K and return to the short term uptrend channel, the creek jump may be doomed to failure.  At the very least, the Wyckoff Wave will need to react back to the creek, this time on reduced spread and volume.

A review of the Trend Barometer shows there is a short-term negative divergence with the highs at point K on the Optimism – Pessimism Index.  This suggests that the effort, as shown by O – P is not being matched by the Wyckoff Wave.  While a strong rally next week can eliminate this, it is another reason to be a bit concerned.  On a more positive note, the Technometer is in a neutral condition and the Force Index is trending upward.

If the Wyckoff Wave is unable to rally past point K and return to the short term uptrend channel, all is not lost for the Bulls.  This gives the Wyckoff Wave a chance to once again back up to the creek and this time present a drying up of supply through reduce spread and volume.

The Bears may consider a failed test of point K a signal that the market will react strongly.  I would suggest that the worst-case scenario would be a return to and continuation of the trading range.  This would create another phase in the figure chart count.

What To Do?

This is a time to watch and let the Wyckoff Wave send us some more definitive signals on its future direction.  Both Bulls and Bears should review their stop orders and make sure their trades do not get away from them if the market moves in the wrong direction.

Both the short term and intermediate term trends of the market are still up, but this may change in the coming week.

Absorption at the top of a Trading Range

This week the stock market, as measured by the Wyckoff Wave, jumped its resistance and moved into new high ground, relative to the trading range.  This was a most interesting occurrence that, in hindsight, looks fairly reasonable, but confused many Wyckoff students, including myself, as it developed.

I don’t like to “miss one”, but if that happens it is extremely important to review the action and be better prepared the next time.

After the Spring at point H, the Wyckoff Wave rallied and penetrated the first line of resistance drawn at point Y.  It then rallied poorly and met supply at point I.  Point I is also right at the last level of resistance in the trading range.  While it was not unexpected to see supply at this level, what happened next caused concern and uncertainty among many Wyckoff students.

The day after point I, the Wave reacted on reduced spread and volume.  This was a lack of supply.  In addition, the fairly strong close suggested some support was met at the resistance/support area drawn at point Y.  This suggested the Wave may attempt to penetrate the resistance.  The next day brought reduced spread and volume which translates to a lack of demand.  Patently, the Wave was not prepared to jump the creek.  So far, the action suggested the Wave may react to a possible Last Point of Support (LPS) in the area of the halfway point of the rally from point H to point I.

The reaction began the next day on increased spread, but notably decreased volume.  This suggested a lack of demand.  The day’s action added credence to the LPS theory.  This continued briefly on the following day as the Wyckoff Wave opened lower and reacted to point J.

This is when things got a bit confusing.  All of a sudden, good demand came in and the Wave rallied strongly (the best day since the spring) back to the resistance line.  It seemed that the Wyckoff Wave was again ready to jump the creek.  As we saw good support at point J a support line was drawn between points H and J, with a parallel supply line through point I.  The Wyckoff Wave was now in a short-term uptrend (Position 1).

The following day, the Wyckoff Wave reacted on reduced spread and volume.  Again, we saw a lack of supply, giving the Wave another opportunity to penetrate the resistance and jump the creek.  We had also moved horizontally across the short term uptrend channel without making any upside progress.  In most cases, when the Wave reaches a resistance point and is unable to penetrate it fairly quickly (Mr. Evans’ “go and go now” observation), it has a tendency to return to the trading range.  It appeared that the Wyckoff Wave was exactly in that position.

The next day, the Wyckoff Wave rallied on slightly increased spread and slightly decreased volume.  While this suggests a lack of supply, it was not the big demand day that was expected.

Then things got a bit tricky.  The Wave penetrated the resistance on decreased spread and increased volume.  This suggested supply and was exactly the opposite of what would be expected as the Wave penetrated the resistance.  The definition of an upthrust is reduced spread and volume, with the index or stock reacting back to the average level of closes. It would also suggest that there was good overhanging supply from the late spring to early summer trading range. It is shown on the attached chart from points G to U.

When, on October 21st, the expected follow-through to the down side did not occur, other scenarios should be considered.  One of these is absorption.  Absorption is defined as follows:

“If the market or an individual stock fluctuates within a narrow range for that index or stock, it was probably because the market was called upon to absorb offerings that represented stock purchased by over anxious Bulls”.  In this case they got caught in last summer’s markdown, and were anxious to get out even.

Another clue that we experienced absorption is when the market or individual stock reacts on one day, but there is no follow through.  Let’s go back and look at the market action to the right of point I. The inability of the Wyckoff Wave to follow-through to the down side is an important clue. It identifying what was really happening as the Wyckoff Wave moved sideways after its rally to point I.

It was also important to review the Technometer.  It was overbought on only one day after the move from point I and was very oversold on the day the resistance was penetrated.

On October 24th the Wave traded higher on decreased spread and volume.  The next day it reacted on increased spread and decreased volume.  The final signal that the absorption was complete was when the Wyckoff Wave was unable to continue to react back into the trading range.  Instead it rallied, completed the creek jump and moved into an intermediate term uptrend (Position 2).

Counts on the Point and Figure chart can be taken from point J.  In phases they are, J to H, H to F, F to D, D to Z and Z to X. If these counts work out, the maximum objectives will take us back near the 2007 highs.

Before that happens, it is quite probable that the Wyckoff Wave will back up to the creek.  If the backup is successful, a more important last point of supply will be established.

The narrow fluctuation as the Wyckoff Wave was at the top of the trading range and the inability to follow through to the down side were important signals that absorption was occurring.  It is an important lesson to include in our Wyckoff play book.

A Creek Jump or an Upthrust?

On Friday, the Wyckoff Wave moved through the final resistance of the trading range into new high ground.  Is this the beginning of an important Jump Across the Creek  or will the Wyckoff Wave upthrust the trading range and begin a move to the down side?

Legitimate arguments can be made for both scenarios.  The Bulls can point to an oversold Technometer and that the Wave has respected the short term up trend channel drawn through points H and J.  They can also point out that three of the stocks that make up the Wyckoff Wave, IBM, UNP and WMT, all in positions one and two.  They had left the trading range and have established defined uptrends.

The Bears can’t say, “not so fast”.  They can point to Friday’s action.  The Wyckoff Wave traded higher on increased volume.  It closed at the top of a narrower price spread.  Narrower spread and increased volume suggest supplies present.  While the Bulls can counter with “you can expect to see supply as the resistance is penetrated”, this does not preclude the possibility of an upthrust.  In addition, the  Optimism – Pessimism Index is not keeping pace with the Wyckoff Wave.  While the Wave is in new high ground, the O – P is lower than it was at points I, G, and E.

The O – P Index represents effort, while the Wyckoff Wave represents results.  That means that the Wave is trying to advance, but, so far, it is not receiving the necessary support of the effort from the O – P.  This situation does make the Wyckoff Wave vulnerable to a decline. This negative divergence is especially noticeable as the Wave moved sideways from point I.
While this negative divergence could certainly be eliminated with a strong positive performance on Monday, it does give reason to conclude the Creek Jump is not a foreseen conclusion.

The Wyckoff definition of an upthrust is that after moving laterally in formation for a period of 4 to 12 weeks or more, the stock or index would move into new high ground.  It would do so on increased volume and narrowing of spread.  It would then react back the average level of closes.

The Wyckoff definition of a Jump Across the Creek is the penetration of a point of resistance on increased spread and increased volume. While it is preferable that this happened in one day’s trading, a Creek Jump can take place over a couple of trading days.

It is also helpful to compare the Force Index with the Wyckoff Wave.  If a second rally brings out a lower Force Index reading and the market makes a new high, this is a negative indication and can indicate a possible reaction.

The difficulty surrounding the Bear’s argument is that if Monday’s market action brings in a strong demand, the divergences can disappear and the Bears will be struggling to close their positions.

This conflict should be decided early on Monday.  To finish the Creek Jump, the Wyckoff Wave must open strongly and we should see an increased price spread and strong volume.  If the Upthrust scenario is to play out, supply will come in either at the opening or after a lackluster start to the upside.

What To Do?
Anyone holding short positions should watch the opening carefully and be prepared to close them at the first sign of good demand. If the upthrust scenario does play out, positions to the short side should be considered.
Those holding long positions should be prepared to close them if the market does not “go and go now”.

The short term position of the market is up.
Although it may change, presently the intermediate term trend of the market is still neutral.

Timing the Market and Turning Points

The stock market, as measured by the Wyckoff Wave turned in a most interesting week.  The rally off the spring at point H was, in my opinion, difficult to analyze and in several instances, has not behaved according to expectations.  It has caused difficulties for short-term traders, of which I was one, but has reinforced important lessons about how short-term traders deal with turning points in the market.

Before getting to that, let’s go back and review the rally off the spring. On October 4th, the Wyckoff Wave sprung the trading range at point H.  Strong demand came into the market. The next day both spread and volume decreased.  This is an indication of a lack of demand.  The day after that, while the spread increased slightly, volume again decreased.  The Wave was starting to approach the upper levels of the trading range and with the exception of the day of the spring we had not seen strong demand.

The next day, the Wyckoff Wave experienced an intra day failure to the upside.  It closed in the bottom half of a narrower trading range and, once again, volume decreased.  The intra day failure suggests a lack of demand.

This Monday, the Wave penetrated the resistance.  The penetration did occur on increased spread, but once again volume decreased.  This suggests a lack of supply.

If the Wyckoff Wave was going to jump the creek, we would have expected to see much stronger demand, especially on Monday when the resistance was penetrated.

Two other scenarios would be the potential for an upthrust or, despite slight penetration of the resistance, a reaction back to test the spring.  As we had not seen any inklings of supply, the reaction to test the spring seemed the most viable option.

Intermediate term traders to the upside, who have already taken a long position on the spring, are not that concerned.  They have already moved stop orders to cover costs and ensure a small profit and are simply waiting for a reaction. Then they can add to their positions on a successful test or, in the case of an upthrust, close their positions with a small profit.

The short term trader, who has taken a long position on the spring, is looking for a top to close the trade.  The trader is also looking for opportunities to the down side once the market turns.  Finding the top of the rally and timing their next trade requires a more in-depth analysis of the market action at the top of the trading range.

On Tuesday, the Wyckoff Wave rallied on decreased spread and volume.  This is a definite sign of a lack of demand.  It is also not particularly characteristic of an upthrust.  Short-term traders should be ready to close any long positions and identify good candidates to the down side.

On Wednesday, even though the price spread of the Wyckoff Wave was slightly wider than on Tuesday, it was relatively narrow. The volume increased and an analysis of the intra day waves showed strong supply came into the market during the afternoon hours.  By all accounts, the market, as measured by the Wyckoff Wave, was finally prepared to react.

Short-term traders to the down side could take positions as early as Wednesday afternoon and certainly Thursday morning.  Based on an analysis of the rally off the spring, this looked like an excellent opportunity to the down side.

However, the next day was very disappointing for the bears.  The supply that appeared on Wednesday, dried up on Thursday and the Wave actually closed near the high of the day.  Spread and volume both decreased, suggesting a drying up of supply.  Based on a good Wyckoff analysis, this was not supposed to happen.  But the stock market is a hard mistress and often things do not work out as expected.  What does a short-term trader to the down side do now?

In my opinion, the answer is one of the most important lessons that anyone who trades intra day or on swings needs to understand and follow religiously.  It is this: If a stock does not act the way you expected it to, when you took the position, close the trade immediately.

In this case supply was expected to dominate the market and drive the Wyckoff Wave back into the trading range.  During this reaction, the price spread and volume would provide clues as to whether we were reacting, up thrusting the range, or testing a spring.  Either way, anyone who took a short term position to the down side expected to see supply and a nice beginning to the reaction.

That didn’t happen.  The trader has two choices.  The first is to be disciplined and close a position.  The second is to hope and pray that their entry point was premature and after a day or so the stock will react as expected.  Unfortunately, we all know where that second choice takes short-term traders on a fairly regular basis. I have been there and I have done that.  I suspect I also have some company.

In the interests of full disclosure, I also took a short term position to the down side late Wednesday afternoon.  I closed that position at the opening on Friday.  The fact that I made a small profit is not significant.  The fact that I was disciplined enough to avoid a potential loss is.

To me, it doesn’t matter whether the market continues to rally or reacts next week.  If I cannot be in control of my trade, I should not maintain a position..

On Friday, the Wyckoff Wave rallied on decreased spread and volume.  Again, supply was withdrawn.  Again, I will look for short term candidates to the down side. If I take a short position next week and supply does not return strongly to the market, I will again close that position and reevaluate.  In the stock market, it’s not how much you make it’s how much you don’t lose.

Finally, based on the action of the Wyckoff Wave, I have added a new resistance point at the old upthrust at point A.  I happen to believe that once drawn, trend lines, support and resistance lines should not be changed.  It’s too easy to redraw them to justify our expectations.  However, the Wave has tested and been turned back at the new resistance line twice in the last three days.  If, next week, the Wave reacts, it may be appropriate to re-adjust the resistance line of the trading range.

What to Do?
Short-term traders to the down side should identify candidates and be ready to take short positions.  Short-term traders to the upside, who already hold positions, should either close them or aggressively crowd their stops.

There are no intermediate term opportunities in either direction.

The short term trend of the market is still down, although the down trend channel has been weakened.  The intermediate term trend of the market is neutral.

Springs and Trend Lines

This week the Wyckoff Wave sprung the trading range.  The number two spring has brought the Wave to the supply line of the short term downtrend, with the potential for continued movement to the upside.  This could be the beginning of a bull market or a bit of a disappointment as the stock market says it is not quite ready for its next move.

Let’s revisit the trading range and review what has happened with a special look at the trend channels that have formed during the trading range.

As we all know, in early August, the stock market, as represented by the Wyckoff Wave, experienced a selling climax. This is marked by point X on the accompanying chart.  The rally to Y was the Automatic Rally. The reaction to Z was the secondary test.

We can now draw a new short-term uptrend channel with the support line through points X and Z.  A parallel supply line is drawn through Y.  This is a minor uptrend channel.  We can draw it because we have a second low that is higher than the first low.  However, it is a minor uptrend channel because it does not contain an important Wyckoff indicator.

The Wyckoff Wave rallied from point Z and seven trading days later we had an important Wyckoff indicator.  Point A was an upthrust of the trading range.  The Wave reacted two point B, had a brief rally and completed the reaction at point D.  It then rallied and tested the upthrust at point E.

I did not extend the short term uptrend channel on the chart because it became a bit confusing.  However, while this channel has been weakened it has not been broken.  Then why do we have a new down trend channel?

This is because the new down trend channel is based on the upthrust and not simply on a second higher top or a second lower bottom.  In my opinion, any time a trend channel can be drawn using one of the important Wyckoff indicators it always takes precedence over one that does not.

Why am I spending time on old news?  Because as the days go on this new short-term down trend channel will play an important part in how we analyze the market’s future action.

After testing the upthrust at point E, the market collapsed.  For two days the news  was terrible and the market reacted strongly to the bad financial situation both in America and Europe.  Mr. Wyckoff always said to ignore the news and that you just made what was going to happen, simply happen faster.  This was exactly the case.  More importantly, it drove many of the weaker holders out of the market, transferring a great deal of stock to stronger hands.  This can especially be seen on Thursday, September 22nd.  This is marked as point F.  There was a huge gap opening to the down side.  Even though the Wave was down strongly from the previous day, the gap opening created a narrower spread.  As the volume increased substantially, we can actually see where good demand came into the market.  This was right at, but not below, the bottom of the trading range.

Even though this was a bullish indicator, the Wave weakened the short term downtrend and after the rally to G did not reach the supply line of the short term downtrend.  This is where Wyckoff students, while realizing we are in a short-term down trend, place this little tidbit of information in our memory bank and look for something that may confirm that the market may be prepared for possible action to the upside.  It is amazing how good information can come from what many may consider “bad market days”.

After the rally to G, which was done on good spread and volume, the Wyckoff Wave began to react.  There was a slight negative divergence with the Optimism – Pessimism Index and the Wave was moving into an overbought condition relative to the Technometer.  The expected reaction proved to be important and gave us some good indications as to future action.

Look at the volume.  From point G we saw decreased spread and volume.  Even though the volume increased on the day before the spring, compare the move from point E to point F.  It took over twice as long  to move a shorter distance and, more importantly, the volume was dramatically smaller.  We were drying up supply.

However, the market is not easy.  The day before the spring we saw an intra day failure to the upside and a poor close on increased spread and volume.  Everything is going so well and then, all of a sudden, supply appeared.  Were we going to fall through the ice?  Were these little positive indicators all for naught?  No they were not.  This is why the Wyckoff strategies are so amazing and have been so successful over the last 100 years.  We were seeing the beginning of the spring.

The next day, the Wyckoff Wave sprung the trading range and began to rally. As mentioned earlier, this is a number two spring that needs to be tested.  We are still waiting the test.

Despite the spring, we are still in a short term down trend.  On Friday, the Wyckoff Wave tested and pulled back slightly from the supply line of the short term downtrend channel.  The rally, so far, has not brought out a great deal of demand.  More importantly, we are also not seeing any supply. The rally has been on decent spread and volume. The Wave has rallied past point G and may be prepared to go higher.  Interestingly, the Technometer is still in a low neutral condition and not overbought. This is an important and bullish indication.

Until the Wave proves otherwise, we are still in a short-term down trend.  It will be extremely helpful if the Wave can continue to rally and weaken the short term downtrend.  In doing that we may see a creek jump.  If that is the case, a  successful backup could create a new uptrend channel that is based on not only a spring, but a last point of support.  This would also be the test of the spring.

If the Wave is unable to rally and reacts back to the bottom of the trading range, we need to watch the price spread and volume quite carefully to see if we will have a successful test of the spring.

What To Do?

Short-term traders to the long side, who have purchased on the spring should hold positions and crowd stops.  The wave will either go and go now or react.  As the Technometer is in a low neutral condition, short-term trades to the down side, in anticipation of  a reaction to test the spring are a bit risky.

There are no intermediate term trades to the down side.  Intermediate-term traders to the upside should begin to closely examine candidates for a significant up move in anticipation of a successful last point of support or test of the spring.

Trends of the Market

The short term trend is down.  The intermediate trend is still neutral.

Divergences and Reactions

This week, the stock market, as measured by the Wyckoff Wave, put in a lower top and is reacting to test the bottom of the trading range.  What happened  this week and what clues have we received that may forecast future market action?

Last Thursday, the Wyckoff Wave tested the bottom of the trading range at point F.  It then rallied to point G and is now reacting back towards the bottom of the trading range and the support line of the short term down trend channel.

Let’s examine point F more closely, as an argument could be made that it was a spring.  It did meet some requirements of a spring, as it penetrated the lows at both points Z and D.  However, the rally did not rally on good demand (the first two days presented a lack of supply and the third day suggested some supply was present).  In addition, the rally was unable to weaken the supply line of the short term down trend.

Finally, let’s compare the O – P Index and the Wyckoff Wave at points E and G.  At point E, the O – P  closed at 61,508.  The Wyckoff Wave closed at 27,040.  At point G, the O – P closed at 61,600. The Wyckoff Wave closed at 26,425. At point G, the Optimism – Pessimism Index was substantially higher than the Wyckoff Wave.  This suggests the effort (as represented by the O – P) was greater than the results (as represented by the Wyckoff Wave).

This is a classic negative divergence and suggests a reaction is coming.  This is the second of two negative divergences in this trading range.  If you compare the Wyckoff Wave and the O – P Index at points A and E, you will also see greater effort on the part of the O – P than the results as measured by the Wyckoff Wave.  Again, the result was a sharp reaction to point F.

While divergences are a great way to identify potential turns in the market, they must not be used in a mechanical manner.  They are simply one tool in the Wyckoff tool kit.  Reliance on any one tool can cause the student to miss important clues in the future direction of the market.

In both these situations, the negative divergences were accompanied by weakening demand as the Wyckoff Wave reached both point A and point E.  In addition, the Technometer moved to an overbought condition. An analysis of all these indicators strongly suggested it would be difficult for the Wyckoff Wave to move higher and a reaction was indeed expected.

Divergences aside, are there any positive aspects in the rally from point F to point G?  Even though the rally did not reach the supply line of the short term downtrend, it did exceed the 1/2 way point of the reaction from points E to F.  This positive indication weakens the probability of the “fall through the ice” scenario and the intermediate term ramifications of the up thrust at point A and its test at point E.
After reaching point G on Tuesday, the Wyckoff Wave closed in the bottom quarter of a narrower trading range on slightly increased volume.  This suggests good supply at point G. Then the Wave began to react.

Wednesday’s action was on increased spread and decreased volume, which suggested a lack of demand.  On Thursday, the Wyckoff Wave experienced a gap opening and an intra-day failure to the upside.  The reduced spread and volume suggest a lack of demand.  On Friday, there was another gap opening to the down side, but the spread was reduced and volume slightly increased.  This suggests some demand was present. However, good supply did come in during the afternoon hours resulting in the poor close.

When comparing the reaction from point B to point F with the present reaction we can see a substantial difference.  The reaction from point E was short and had strong supply.  So far, the reaction from point G has been on narrower spread and relatively reduced volume. It has barely exceeded the ½ way point of the previous rally and has lasted longer than the previous reaction.

While things can change, this suggests a successful test of the bottom of the range or a spring.  As mentioned above, the “fall through the ice” scenario is becoming a bit of a long shot.

While I do not see any good entry points to the long side, short-term traders to the down side should watch their positions carefully.  Stop orders should be crowded to ensure profits and close attention should be paid as the support line of the short term downtrend channel and the bottom of the trading range are approached.

When is a test not a test?

A review of the stock market’s action, as represented by the Wyckoff Wave, gives us an opportunity to discuss tests of upthrusts. In this case, what we thought was a test, in fact was not.  We did not see the true test until Tuesday of this week.

To review: The Wyckoff Wave reacted strongly and experienced a selling climax at point X.  The rally to point Y established a new trading range.  This range is presented on the chart with two parallel blue lines.

After the reaction to point Z, the Wave rallied nicely and up thrusted the trading range at point A.  There was then a nice reaction to point B and a two day rally to point C. Even though the rally was brief, the second day was on decreased spread and volume, suggesting a lack of demand.  The Wyckoff Wave then reacted to point D.

Since we had a second rally top (C) that was lower than the first rally top (A), we are entitled to draw a new down trend channel (A – C) with a parallel support line through B.

Until shown differently, C is the test of the upthrust and we should closely watch how the Wave behaves as it moves along the new short-term down trend channel.  We certainly can expect to see support in the area between points Z and X.  What happened?

On September 8th, the Wyckoff Wave experienced an intraday failure to the upside on increased volume.  This suggested supply was present.  The following day, the Wave continued to react on increased spread and volume.  Supply was definitely present and the Wyckoff Wave appeared ready to test the support at the bottom of the trading range.  This is what would be expected after a successful test of the upthrust.

However, things aren’t always as they seem.  After this two day reaction, the Wave experienced an intraday failure to the down side.  It held above point Z.  The intraday failure, on increased volume, indicates demand has returned to the market.  Instead of continuing to react, the Wyckoff Wave began a six day rally that ended at point E.  Let’s investigate this rally on a day to day basis.

On the day following point D, the Wave rallied on decreased spread and volume.  This suggested a lack of demand and opened the possibility of continuing the reaction.  However, that didn’t happen.  The next day, the Wave continued to rally on increased spread and slightly increased volume.  Demand was still present.  However, it was not dominant and the rally was not off to a terrific start.  On the next day, Thursday, September 15th there was dramatically reduced spread and slightly increased volume.  While an argument could be made as to whether today represented the presence of supply or a lack of demand, the bottom line was that the Wyckoff Wave put in another weak performance.

The Wyckoff Wave was now approaching the top of the trading range.  It was either going to jump the creek or react back into the trading range.  The poor quality of the rally suggested the latter.  As expected, on Friday, September 16th, the Wave rose on reduced spread and increased volume.  Again, the day’s action indicated the presence of supply.  This weeklong rally back to the top of the range was of extremely poor quality.  It also put in a top that was higher than point C.  Unlike the short, two day, rally from B to C, this was a more traditional rally to test the upthrust.  It not only dried up the demand, but allowed supply to enter the market.

This Monday, supply came in strongly as the Wave reacted on increased spread and decreased volume.  This lack of demand pretty much confirmed the rally was over. The Wave made one last attempt to rally on Tuesday. The reduced spread and volume coupled with the intraday failure to the upside again suggested a lack of demand.  In addition, an examination of the intraday waves would have shown good supply came in during the afternoon.

This was the real test of the upthrust at point A.  This allowed Wyckoff students to move the short term down trend channel from points A – C (with a parallel support line at B).  The supply line of the new down trend channel is now drawn through points A and C.  The parallel support line is drawn through point D.

On Wednesday, the Wyckoff Wave reacted strongly on increased spread and volume.  It was now headed for the bottom of the trading range, where it would see support, spring the trading range, or fall through the ice. The reaction continued on Thursday, but on decreased spread and increased volume.  This suggested some demand was present.  However, some demand should be expected at the bottom of the trading range.

As I mentioned in Thursday’s Pulse of the Market daily report, we should expect to see a minor rally off the bottom of the trading range.  That began on Friday.  It got off to a poor start as the spread and volume were both less than on Thursday.  This rally should give the Wave a little space before it, again, tests the bottom of the range.

The short term trend of the market, as measured by the Wyckoff Wave, is down.
The intermediate-term trend is neutral.

What to do?

Earlier in the week, traders were advised to look for opportunities to the down side. These positions should be held until a final determination is made as the Wave tests the bottom of the trading range.  No long positions should be considered at this time.

The stock market, as measured by the Wyckoff Wave, put in a short, but interesting week.  The week’s action brought about a successful test of an up thrust and began a reaction that may go simply to the bottom of the trading range.  There are also two other scenarios that will be discussed later in this letter.

On Tuesday, September 6th, the Wyckoff Wave experienced an intraday failure to the down side. The Wave reacted and bounced off the X – Z short-term support line.

Even though the Wave closed lower than it did the previous Friday, the large gap opening to the down side brought in good demand and the Wyckoff Wave rallied to close at the top of a wider spread.  This rally was short-lived as demand was withdrawn on Wednesday.  The Wave then reacted on both Thursday and Friday.  Friday’s action slightly weakened the support line (X – Z) of the original short-term uptrend channel.  The supply present on Friday, coupled with the poor close, suggests there is a good chance the support line will be further weakened when the market opens on Monday.

Presently, the Wyckoff Wave is in a neutral condition relative to the Technometer.  It is not getting any support from the Force Index which is slightly lower than it was at point B.  The Optimism – Pessimism Index is presently in harmony with the Wyckoff Wave.

Because we saw an up thrust at point A, that was successfully tested at point C, we can now draw a short-term down trend channel with the supply line through points A and C and a parallel support line through point B.  In my opinion, since we have the confirmed Wyckoff principle of an up thrust and successful secondary test, the short term downtrend channel takes precedence over the short term uptrend channel.  In addition the short term uptrend channel was slightly weakened on Friday and has a good chance of being substantially weakened on Monday.

Trend channels in trading ranges are helpful, but unless they involve possible ending action, like up thrusts and springs, they can be quite short lived.

Where Do We Go From Here?

The Wyckoff Wave should answer some definitive questions this week.  There appear to be three possible scenarios:

1.  The Wyckoff Wave reacts to the bottom of the trading range, which is also the support line of the short term down trend and then rallies to continue the trading range.  At some point, the rally would need to weaken the supply line of the short term downtrend channel.

2.  The Wyckoff Wave will spring the trading range.  It is not uncommon to see a spring following an up thrust.  If this happens, it will be helpful if the response to the spring weakens the supply line of the short term downtrend channel.

3.  The Wyckoff Wave will fall through the ice and begin a significant move to the down side.  As mentioned last week and shown on page 2 of the accompanying charts, point A was not only an up thrust but a possible rally back to the bottom of the May – July trading range. There is potential on the 100 point and figure chart for a significant downward move.

What To Do?

Short term traders had the opportunity to take short positions in the area of point C.  In my opinion, there are no short term positions that should be taken to the upside.

Any short positions should be closely watched and the trader should be prepared to close them if and when demand returns to the market.  Positions taken at the up thrust test should now be profitable and stops should be moved to protect those profits.  Until proven otherwise, these are very short-term trades.

Interestingly, as I only trade Wyckoff Wave stocks, I only found one candidate that fits my qualifications for a short sale.

Intermediate term traders could have also shorted of the market on the secondary test.  If scenario 3 plays out, they can add to their short positions at the last point of supply or rally back to the ice.  Again, as these could be extremely short term trades, any short sales must be watched closely until the fall through the ice is confirmed.

This should prove to be a most interesting and eventful week.  Trade carefully and watch closely.