Have We Tested The Spring?

The Wyckoff Wave spent most of this week finding support at the 30,742 level. This is the support level of the original trading range that began in January.  It is marked by a support line drawn from point V.

On Monday (marked by the red up arrow), the Wyckoff Wave experienced a gap opening to the down side and spent the day rallying back to just below the previous Friday’s close. The day’s action suggested a lack of demand.  This meant that the Wyckoff Wave was vulnerable to continuing its reaction.

And react it did.  The following day brought in good supply and the Wyckoff Wave reacted to the above-mentioned support line.  However, the reaction could not be sustained and the afternoon brought in good demand.  The Wave rallied to close near the top of a wider price spread.

This was significant as support came in exactly where it was expected.  Then the question became, would the support hold or would this be a minor rally followed by a reaction that drove the Wyckoff Wave through the support line?  The Wyckoff Wave spent the rest of the week trying to answer that question.

Wednesday brought a gap opening to the down side.  However, once again the support line held and the Wyckoff Wave rallied in intra-day.  While it closed off its highs, in the bottom half of the day’s price spread, the quality of supply was reduced.  This second day of support and the slight drying up of supply, made the Wyckoff Wave vulnerable to rally.

Cover up the last two days of the week. Then ask yourself, could this have been a successful test of the spring or even a Last Point of Support (LPS)?

If you look at the price spread and volume, the answer is most probably not.  Notice the wide price spread and more importantly, the relatively high volume.  Wednesday’s volume was even higher than Tuesday’s.

In addition, there was no help from the Technometer as it remained in a neutral condition.

Only the Optimism – Pessimism Index was somewhat bullish.  There was a positive divergence with point H.

An analysis of all this should conclude that we needed to see more drying up of supply before the Wyckoff Wave could begin to put in a more serious rally.

The next two days (Thursday & Friday) on the chart did not bring us much more clarification.  On Thursday, a move to the upside on reduced price spread and volume suggested a lack of demand. This made the Wave vulnerable to supply and it looked like it was making an appearance on Friday.

The Wyckoff Wave was now in a very vulnerable position.  On Thursday, it tried to rally off the support but ran out of demand.  Friday morning brought a gap opening to the down side.  The Wyckoff Wave actually opened right on the support line.  Any follow-through here would have driven the Wave through the support and down to its next support area.  This is the top of the November – December trading range.

However, that didn’t happen.  The Wyckoff Wave rallied off the bottom on good intra-day demand.  It tried to go up, but late in the morning, supply came in stifling the rally.  It then tried to go down.  However, the supply, while certainly very present, was not strong enough to push the Wyckoff Wave all the way back to the support line.  It closed in the middle of a wider price spread and on increased volume.

Robert Evans gave this phenomena a name.  He called it “tried to go up, tried to go down, closed in the middle on increased volume”.  More importantly, he suggested that when this happened the affected stock or index was probably going to make a move rather quickly.  The question is which way will the Wyckoff Wave go?

The fairly wide price spread and relatively increased volume make it difficult to conclude we have seen a test of the spring or a LPS.  This would suggest the next move might be to the down side.

However, for the last four days, the Wyckoff Wave has been supported, where expected, at the bottom of the original trading range.

The Optimism – Pessimism Index is still in its up trend channel and there is that minor positive divergence with point H. The Force Index is not particularly negative and also is in a positive divergence with point H.

Unfortunately, the Technometer is of no help as it is, and has been, neutral.

It appears that one of three things can happen.

1.  Strong supply can enter the market and drive the Wyckoff Wave sharply downward.  In my opinion, this is the least likely of the three scenarios.

2.  The Wyckoff Wave can react on decreased spread and especially decreased volume and complete the test sometime early next week. Even if the Wyckoff Wave moves below the support, as long as it holds above point F, and does so on reduced spread and volume, we would have a successful test of the spring.

3.  The Wyckoff Wave can rally off the support and test support line F – H.  If the test is successful, the Wave could then react and put in a successful test at a later date. This may well be the most likely scenario.

It seems to me that the stock market, as measured by the Wyckoff Wave, still needs to take in more supply.  The widespread and relatively high volume is somewhat bearish.  The support is somewhat bullish.  The fact that neither supply or demand can grab control of the market suggests we are not yet ready for a definitive move in either direction.

When I see a standoff in supply and demand, as shown in the price spread and volume, I often look to the Technometer as a significant indicator.  The fact that the Technometer continues to be in a neutral condition tells me the stock market is not quite yet ready to rumble.

Are We (Finally) Testing the Spring?

Wyckoff students know that number one Springs (Shakeouts) and number two springs need to be tested.  It’s simply a matter of waiting for the test to happen.

This week, it finally appears the Wyckoff Wave is reacting to test the spring at point F.  It’s been a long road with a detour or two to get to this point.  However, with the weakening of the short term uptrend channel, drawn in blue, enough supply has entered the market to begin to drive the Wyckoff Wave back down towards point F.

Unless Wyckoff investors and traders to the up side entered the market on the spring, they were simply content to wait and enter the market on a successful test of the spring.  They were not particularly interested in the minor fluctuations as the Wyckoff Wave rally to point I.  They knew that at some point the market would react and then they could use all their Wyckoff tools and take long positions if the test was successful.

Short term Wyckoff traders to the down side paid much more attention to the rally off the spring.  They were looking to take short-term positions to the down side and wanted to get in at the highest possible level.

Timing the market is tricky business.  The Wyckoff student needs to use all of his Wyckoff tools.  While analyzing the price and volume relationships is the most important part of the analysis, the Optimism – Pessimism Index (especially when observing divergences and inharmonious actions), the Technometer and the Force Index can provide valuable confirmation to the initial price and volume analysis.

In a previous Market Letter, we discussed the rally off the spring to point G.  It was a very reasonable and expected rally.  The final day of the move to point G was on good spread and sustained volume.  The next day saw a lack of supply.  That was followed by a strong move to the down side, ending at point H.  Was this the reaction to test the spring?

On the rally to point G, there wasn’t a drying up of demand.  Instead, out of the blue, good supply came into the market.  While the Wyckoff student would not eliminate the conclusion that this was the beginning of the test, there were several unanswered questions.  This would preclude taking a short term position to the down side.

Volume remained extremely high on the reaction to point H. This was certainly not a drying up of supply, that would be anticipated during a successful test.  Nor was the Technometer in an over sold condition.

The market was sending mixed signals and when this happens, the prudent Wyckoff student simply watches and waits.

The market then rallied to point I.  Volume continued to reduce on the rally and price spread was mixed.  This was not nearly as positive as the rally from point F to point G.

In addition, the Wyckoff Wave moved into a dangerously overbought condition on the Technometer and had developed negative inharmonious action with the Optimism – Pessimism Index, when compared to point G.

The critical day came two days before the high point I.  I have marked this with a red arrow.  The Wyckoff Wave rallied on decreased spread and volume.  In addition it closed near the lows of the day.  The Wyckoff Wave continues to be in a dangerously overbought condition, relative to the Technometer.

It is important to note that the Technometer can be a bit of a leading indicator in presenting overbought and oversold conditions a day or two before the actual turning.

At this point, it certainly appeared the reaction to test the spring was ready to begin and short term trades to the down side should be considered.

One of the important Wyckoff rules is that if considering positions to the down side, the Wyckoff student should select stocks that are weaker than the market.  This important principle was demonstrated two days later.

On the day marked point I, the Wyckoff Wave put in a nice rally on increased spread and slightly increased volume.  It could be considered a rally to catch stop orders.

However, if the Wyckoff students, who took a short position to the down side, had selected a stock or stocks weaker than the market, they were probably protected from this last-ditch rally.

It is also interesting to note that the Wyckoff Wave put in a minor head and shoulders formation before it began to react.  On the day following point I, there was a gap opening to the down side. The Wyckoff Wave spent the day attempting to rally on reduced spread and volume. This would suggest demand was withdrawn.  That set the stage for Thursday’s and Friday’s reaction which weakened the short term up trend channel.

Where will the reaction stop?  Is  The first level of support is the resistance line drawn last May through the 2011 highs.  That is shown in red on the chart.

The next support area is the bottom of the original trading range, drawn from point Y.  It will be interesting to see how the Wyckoff Wave reacts as it approaches these two significant support areas.

However, just because the Wyckoff Wave is reacting to test the spring, does not mean the test will be successful.  The good Wyckoff student always looks at every scenario.  Prejudging the market is a recipe for disaster.

While the Point & Figure Chart is not really geared to anticipate objectives in a trading range, it is an interesting tool.  If we take account from point I, along the 32,000 line, we can see there are two phases in the count.  The first is from point I to point E.  The second is from point E to point A.

Phase 1 gives us a count of 1,800 points and an objective of between 32,000 and 32,200.  This is just below the spring.  If the Wyckoff Wave reached this objective and then rallied, we would have a poor quality test of the spring. Poor quality tests need to be re-tested.

If the entire count is reached, this will place the Wyckoff Wave back at the October – December trading range.  This would suggest the Wyckoff Wave would enter a new trading range before making a substantial move.

Will the test be successful?. Based on the price spread and volume analysis of the Wyckoff Wave, beginning at point W, the odds favor of a successful test.  However, all the scenarios should be examined and studied to ensure when the market is reentered, the risk reward ratio is his lowest possible.

What Happened to the Test of the Spring (Shakeout)?

In my last market letter, I discussed how the Wyckoff Wave would be testing the spring (shakeout) we saw at point F.  While we did see a brief reaction on Monday to point H, the day’s market action was not of good quality and the Wyckoff Wave rallied for the next four days.

Patently, this past week did not bring a test of the spring, but it did present an opportunity to discuss some important Wyckoff principles.

The Wyckoff Wave is aptly named as the stock market’s highs and lows are like the crests and troughs of ocean waves.  They begin quietly and grow to be quite significant.  Whether you are short-term trader looking at intra-day waves or an intermediate term trader who studies the most significant waves, the lessons are still the same.

It is important to understand that it takes a multitude of smaller waves to develop the significant ones.  The Wyckoff Wave’s action from the spring gives us an opportunity to look at this in more detail.

As discussed previously, the Wyckoff Wave sprung the market at point F and rallied nicely to point G.  There, the rally appeared to run into trouble and we saw a sharp decline (marked by the red arrow), a poor quality rally and another decline to point H.

The day marked by point H was interesting in that there was a large gap opening to the down side.  The Wyckoff Wave then spent the rest of the day rallying and closed at the top of its price spread.  Despite the fact that today’s close was substantially lower, one can see by the chart that good demand came into the Wyckoff Wave.  This was inconsistent with the expected reaction to test the spring and was a warning sign that the test may be in a bit of trouble.

It was also important to look at the volume of the Wyckoff Wave beginning with the day marked by the red arrow.  Notice the high-value.  That was normal as we were expecting a reaction to test the spring.  It would’ve been nice to see some good follow-through to the down side and some reduced spread and volume, which would indicate we may have a successful test.  That didn’t happen

The next day the Wyckoff Wave rallied on decreased spread and decreased, but relatively high volume.  While the volume was decreasing, it was still high compared to previous reactions.  This relatively high volume was sending us a message.  It was either we have good supply and the reaction will continue or, there is a bit more demand than expected.  A reaction to test a spring is to allow supply to dry up.  A successful test means that demand comes into the market only when shares are scarce.  On a successful test, demand is not fighting with supply because there is little supply left to do battle.

This is important, because we expect to see this drying up of supply on a test of the spring.  If we don’t, there is a change in character and things are not going to go exactly as expected.

This is why the day marked by point H is so significant.  Demand should not be coming into the market at point H because supply is not dried up.  This would suggest demand is coming in for another reason.  It turns out, the reason was the rally off the spring had been completed.  Apparently we were either going to test the highs at point G or the rally from point H was simply a continuation of the rally off the spring.  Whatever the reason, we were not yet in a reaction to test the spring.

The day following point H brought increased price spread and decreased volume.  The relative volume was still high, suggesting some demand was still present.  However, the day’s price spread and volume did suggest a lack of supply.  This was interesting as it is not uncommon to see a lack of supply at the beginning of a rally.

Does this mean that point H was indeed the test of the spring?  Could we say that the decreased spread and volume compared to the day marked by the red arrow would justify a test?

The answer is absolutely not.  This is where we have to be disciplined.  Basic Wyckoff tells us that a spring is tested on a drying up of supply indicated by decreased spread and volume.  The price spread at point H was wider than the previous day and the volume, while reduced, was relatively high.

If anyone needed more convincing, the Technometer was in an overbought condition.  I don’t know about you, but I am very skeptical about taking a long position when the Technometer is overbought.

While I was looking for, and expected, a reaction to test the spring, it was very evident something wasn’t quite kosher.  When that happens, it is best to move to the sidelines and wait for the market to tell you what it is doing.

On Wednesday (two days after point H), the Wyckoff Wave again rallied.  This time it was on decreased spread and volume.  This suggested a lack of demand.  However, the Wyckoff Wave penetrated and therefore weakened the short term down trend supply line drawn through points E and G. It also took out the highs at point G.

The next day (the second to last day on this chart), the Wyckoff Wave traded higher, again on decreased volume.  The price spread and volume suggested a lack of supply.  The Wave also substantially weakened the E – G supply line.

This gives us an opportunity to draw in a new, temporary, short-term uptrend channel.  This channel, which is drawn in blue may come into play if the Wyckoff Wave continues to rally.  However, this does not mean the trend has changed.  The short term trend is still neutral.  This is because supply line E – G has only been weakened.  It has not been broken.  It is there primarily to watch how the Wyckoff Wave behaves in the area of the supply line (drawn from point G). This is not a Wyckoff principle.  I like to draw in trend channels, whenever possible, simply to watch how stocks behave as they approach either supply lines or support lines. I only believe the trend changes when a trendline is weakened, then tested and resumes its rally or reaction.

We now have a positive wave from points F to G.  A negative wave from points G to H. Finally, this past week has been a positive wave. If we compare the strength of the two positive ways, F to G and H to the end of the chart, we see that the second wave is weaker than the first wave.

In addition, the Technometer is dangerously overbought.  We are seeing a lack of demand and reducing relative volume.  If you notice, the relative volume for the last two days on the chart is below the average volume we have seen since point A.

It is also important to note that the Technometer has been overbought for the last three sessions on the chart.  An overbought Technometer is not a mechanical signal that the Wyckoff Wave will react.  It is an important tool that needs to be considered, but always is secondary to price spread and volume analysis.

What we did see on Friday is reduced price spread and reduced volume.  In addition, supply came in late in the day resulting in a poor close.  If you compare this price spread and volume action with the price spread and volume action around point G, you will see the latter is substantially weaker.  This, coupled with the oversold condition on the Technometer, suggests we may actually be seeing the beginning of the reaction to test the spring.

It is also an opportunity for intra-day or swing short-term traders to look for positions to the down side.

This whole discussion, while perhaps interesting to intermediate and long-term traders, is irrelevant as they are waiting for a successful test of the spring before entering the market or adding to their positions to the long side.

However, for all Wyckoff students it is an interesting analysis of waves and how they play into more important Wyckoff concepts.

Testing the Spring – Are We Going Up or Down?

This week, the Wyckoff Wave concluded its rally off the spring (shakeout) at point F and began testing reaction.  Its success or failure could significantly impact the future direction and objectives of the stock market, as measured by the Wyckoff Wave.

While many Wyckoff students, including myself, have a bullish bias, it is extremely important not to allow this to cloud our judgment.  It is always best to analyze multiple scenarios and have action plans in place to take advantage of changes in market direction.

As the Wyckoff Wave reacts to test point F, one of three things will happen.
1.  The test will succeed and the Wyckoff Wave can rally again, most probably as a Sign of Strength.
2.  The test will fail and the Wyckoff Wave can fall through the ice as a Sign of Weakness.
3.  The test will succeed, but its lows will be below point F.  This is a test of poor quality and will need to be repeated.

If scenario three happens, we can expect the Wyckoff Wave to continue to move sideways and there will be no immediate change in direction.

However, we need to be prepared for scenarios 1 & 2 as they will give us opportunities to take positions and record profits.

In addition to the Vertical Line Chart, I am also attaching the 100 Point & Figure Chart of the Wyckoff Wave.  I have transferred the annotations to the Point & Figure Chart and drawn in phases and objectives.

Before we get to that, let’s quickly review the Wyckoff Wave’s recent action.  The Wyckoff Wave appeared to spring the original trading range (defined by a support line drawn from point V and a resistance line drawn from point W). It then rallied to point A, backed up to point B and was expected to begin a nice advance.  That didn’t happen.  The rally to point C was of poor quality.  The reaction back to point D was on good spread and put in a lower low.  The final rally to point E, was unable to take out the highs at point C.  The Wyckoff Wave then reacted back into and through the original trading range.  That brought us to the shakeout (spring) at point F.

This week, the Wyckoff Wave rallied off point F.  To judge the nature of the rally, I have drawn a very short, temporary, up trend channel.  The support line is drawn through point F and the low of the day as marked with the up arrow.  A parallel supply line is drawn through the highs of the day marked with the up arrow.  It was interesting to notice how that supply line was respected at point G, as the Wave appears to have reached the end of the rally off the spring.

The Wyckoff Wave then reacted to weaken the temporary short-term uptrend channel and on Friday, put in a weak rally attempt.  This may be confirming the break in the temporary short-term uptrend channel.  This would allow the Wyckoff Wave to continue to react for this important test.

When the Wyckoff Wave returned to the original trading range, two phases were created on the Point & Figure Chart.  The first phase went to point Z.  The second phase is from point Z over to point V.

Two important points must be considered when analyzing these phases.  First, we do not have a successful test and, therefore, cannot accurately pinpoint the exact count and the price level we can use for the count. Any counts along a price level must be estimated.

More importantly, what if the test fails?  Then there is no rally and therefore, no count at that level. Instead we would have to look at the trading range as distribution and point G as a Sign of Weakness.

Both of these scenarios are drawn on the attached Point & Figure Chart.

The bullish scenario is drawn along the 30,700 line.  This is only a general area of where the successful test would be completed.  This line will change if the test is completed at another level.  That is why there is a question mark at the right side of the counter line.

Phase 1 gives us a count of 2,600 points.  This gives us a objective of from 33,000 to 133,300.  Phase 2 gives us an additional count of 2,500 points.  This gives us a total objective of from 35,600 to 35,800.

The maximum objective puts us back into the distribution area of the 2008 highs.

If we see a successful test and a Sign of Strength, the Wyckoff Wave can then react and have a Last Point of Support.  This would add to the count and most probably put the Wyckoff Wave into historical new high ground.

If the test fails and the Wyckoff Wave falls through the ice, we could establish a count line along the 31,600 price line.  Again, there are two phases. Phase 1, over to point A, from point G, gives us a count of 1,900 points.  This presents an objective of from 30,300 to 29,700.

If we combine in phase 2, we have a total count of 5,000 points.  Now the objective is from 27,200, down to 26,600.  This would take the Wyckoff Wave back to test the November lows.

It can also be argued that there are three phases in this count, with the second phase ending at point W and third phase going from point W to point U. If the test fails and we do see a reaction, I will probably make that adjustment on my Point & Figure Chart.

There is no way a Wyckoff student can predict the success or failure of this important test.  The market, and only the market, will provide this answer.  Therefore, while we may have logical opinions, we need to prepare for both scenarios so we can act when the time is right.

A final note on trend lines.  Trend lines can be extremely helpful in identifying, not only direction, the changes in direction.  While the temporary short-term trend channel will probably only be good for a few days, you can see how it gives us an opportunity to see a possible change in direction.

If the reaction continues, it would not be inappropriate to draw a short-term down trend channel with a supply line drawn through points E and G, with a parallel support line drawn through point D.  Even if the test succeeds, this downtrend line will give us helpful information.

Hopefully, after several months of moving sideways, we are at a bit of a turning point.  It will be fun to see what happens next.

The Technometer to the Rescue

The Wyckoff Wave had an interesting week.  The highlight was the large reaction on Wednesday (point F).  The increased price spread and volume drove the Wyckoff Wave through the bottom of the original trading range and into new low ground.

What was happening?  Recently, it appeared the Wyckoff Wave was in a new trading range after the rally from points Z to A.  Then, after a rally to point E, the Wave reacted to test the lows of the “new trading range”.  It seemed this would be at point D, the support/resistance line drawn from the May, 2011 highs or the support line of the original trading range drawn through point V.

Instead, the Wyckoff Wave reacted on decreased price spread and slightly decreased volume.  Then, on Wednesday, strong supply came into the market.  The Wyckoff Wave penetrated all the potential support areas on increased price spread and volume and appeared to be headed for a significant reaction.

As I studied the Wyckoff Wave that Wednesday evening, one thing jumped out.  The Technometer reading was 37.06.  Anything below 38 is considered dangerously oversold.  The Technometer is part of the Trend Barometer indices that were developed in 1934.  For over 75 years it has been uncannily accurate in identifying turning points.  When used in conjunction with the Force Index, it also gives an indication of the strength of the rally or reaction after the turning point.

Despite the significant presence of supply, the dangerously oversold condition of the Technometer suggested we could be experiencing a shakeout.  A shakeout is also a number one spring.  That evening, in my daily market letter, I advised that we could be seeing a shakeout and this could be possible ending action.

A shakeout needs to be followed by a good rally.  While the day following point F wasn’t terrific, the next day was and we saw good price spread and volume to the upside.  The Wyckoff Wave returned to the trading range, which is now identified with a support line at point V and resistance drawn from point A.

The shakeout will have to be tested, but the reaction expected by many traders did not happen and the Technometer gave us an important clue.

In the past few weeks I have received several e-mails from people questioning the Technometer, the Optimism – Pessimism Index and the Force Index.  Many felt these were mechanical indicators and not in concert with true Wyckoff teachings.  Because of that, I wanted to share portions of an Evans Echoes lecture given by Mr. Evans almost 50 years ago.  I have transcribed the lecture and it appears below in italic type.

This is the story of the Wyckoff trend barometer.

The Wyckoff Trend Barometer was invented by a Wyckoff student whose name was H. P. (Toby) Warey
 in 1934. Mr. Warey, who was an outstanding electrical engineer, approached Mr. Robert Stanlaus then president of Wyckoff Associates. Mr. Stanlaus was one of Richard Wyckoff’s assistants who ran Wyckoff Associates, which later became Stock Market Institute, after Mr. Wyckoff’s passing.

Toby Warey said “Stan, I’ve got a Trend Barometer.” Stanlaus’ reply was paraphrased as follows: “Toby Warey, I would buy you dinner, I would take you to the ball game, I would do almost anything that you ask me to do, but please don’t ask me to look at a Trend Barometer.

You see, almost all of us, somewhere on the line get an idea which we feel will be a mechanical gimmick that will help us catch all market changes without even thinking

Everyone at Wyckoff Associates knew hundreds  of students who have done the same thing. Naturally, Mr. Stanlaus had been exposed to almost all of them to the point he was almost saturated with these ideas.

Toby Warey said, “Stan, when you learn where I get my information and what I use for my formula, I believe that you will listen. Everything I use in the construction of my indices have been taken from the Wyckoff Wave chart.  I use a modified version of the engineers physics formula for force and momentum as the basis of my entire work.” Stanlaus, who also had been an electrical engineer, before he became a Wyckoff student, said, “let me see it.”  

Robert Stanlaus knew the scientific value of the wave chart.  He also new that any  knew index would have to have for its foundation the information that the Wyckoff Wave offered. Because he was an electrical engineer he also knew the importance of the idea of using force and momentum. They had their meeting together. The trend barometer was explained and the trend barometer was put in the hands of Wyckoff students in 1934.

I have seen hundreds of things which are supposed to be similar, but they’re all gone and the Wyckoff trend barometer is being used today by more people than ever before. Because it is totally based on the intraday fluctuations of the Wyckoff Wave or any stock, it is not a mechanical device, but an important tool that will help Wyckoff students identify important turning points and the potential strength and weakness of rallies and reactions.

I have always found the Technometer and Force Index to be terrific tools in helping me identify changes in the market.  However, they are not mechanical.  Sometimes the Technometer will become oversold a few days before the change in direction.  Some days it becomes oversold right at the change of direction.  These tools must be used in conjunction with our Wyckoff studies.  To consider them to be mechanical indicators would be a major mistake and to interpret them that way could be a very expensive proposition.

Now, back to the chart.

The Wyckoff Wave has rallied off the shakeout at point F.  Friday’s action, a decline on decreased spread and volume, suggests some demand is still present.  The Wave may be beginning its reaction to test the shakeout, or it may be resting and will attempt to rally some more early next week.

Either way, it doesn’t really matter.  The shakeout needs to be tested and at some point, in the near future, this will happen.  The test will give us one of three different results.

1.  The test can be successful and the Wyckoff Wave will rally and hopefully put in a Sign of Strength, a Last Point of Support and begin a new rally to the upside.

2.  The tests will be successful, but the low will be below point F.  This is considered a weak test of the shakeout.  When this happens we can expect a second test to confirm or deny its success.

3.  The test will fail and the Wyckoff Wave will begin a downtrend.  If this happens, a supply line of the downtrend channel will be drawn from point E and the high of the rally off point F.  A parallel support line will be drawn from point F.

Once again, it will be important to keep a close eye on the Technometer during the test.  If the Technometer, once again, moves into an oversold condition, and the reaction is on reduced spread and volume, we can expect a successful test.  This will be even more significant if the Technometer becomes more oversold than it was at point F, but the Wyckoff Wave is higher than at point F.

We are at an interesting and important juncture.  While we must pay very close attention to price spread and volume, the Technometer can give us some important clues to the market’s next direction.

Are We In A New Trading Range?

This week, the Wyckoff Wave rallied to point E and then reacted back to test the lows at point D.  Does this mean we are beginning a new trading range?

There are positive signs that we are and negative signs that present the possibility of a deeper reaction.  Let’s take a look at both scenarios and see if we can come to some sort of a conclusion.

First the negative arguments.  After breaking out of the original W – V trading range, the Wyckoff Wave reacted from point A back to the edge of the Creek at point B.  It then rallied briefly to point C.  Notice that we now have a lower top.  The reaction to point D not only pushed the Wyckoff Wave back to the far bank of the creek, but it put in a lower bottom.  We now have lower tops and lower bottoms.

The Wave then rallied to point E.  The major portion of this rally was on last Monday.  Interestingly, the highs at both points C and E were the same at 32,044. However, this rally did not create a new high and break the trend of lower tops.

The reaction to point D had dramatically weakened the H – P support line.  The brief rally to point E was unable to move through the support line, but instead reacted.  This breaks the support line and any up trend channel.  The breaking of the trend is an important development and gives the Wyckoff Wave an opportunity to put in a noticeable reaction.

Now, let’s investigate the positives. The three day reaction from point E has been on reduced spread and, on Thursday, reduced volume.  The fact that the volume began to dry up as the Wyckoff Wave approached the bottom of the new trading range is a positive indication.  In addition, the reaction from point E, when compared to the reaction from point C, is on relatively reduced spread and volume.  This gives the Wave a reasonable opportunity to test the lows at point D and rally back to test the highs at point E and the top of the trading range.

There is not a great deal of potential for a sustained reaction.  There is a count of 800 at the 32,000 level on the 100 Point & Figure chart.  This gives us a present maximum objective of 31,200.  Thursday’s low, on the Wyckoff Wave was 31,362.  This puts the Wyckoff Wave in the objective area.

It is important to understand that this is not necessarily a complete count.  So far, there has been no ending action and before that happens we will, most probably, see a larger count play out.

Although the Technometer is in a high neutral condition, any reaction will, most probably, move into an oversold condition.  This is because the Technometer has been in an overbought position for several days.

The red horizontal line, drawn just below point D is the resistance line drawn from last Spring’s highs. Once this line was definitely penetrated, as it was on the rally to point A, it becomes a significant area of support.

An examination of the Wyckoff Wave stocks shows that most of them are in an intermediate term uptrend channel.  Of the 12 stocks, 10 are in an intermediate uptrend channel and 2 are neutral.

Short-term, 3 stocks are in an uptrend channel, 1 is in a downtrend and 8 are neutral.

While many of the individual stocks are in a preparation period in anticipation of a potential advance, none appear to be ready for a significant decline.

While one should never say never, it appears the market is in a watch and wait period not ready to move in either direction until we have a more definitive ending action.  It also seems that, unless we have more evidence to the contrary, that direction will be up.

The breaking of the intermediate-term support line simply confirms that the intermediate term trend of the Wyckoff Wave is neutral.  The short term trend is also neutral.

What can we expect in the coming weeks?  I suspect the Wyckoff Wave will continue to move sideways.  However, there is always a possibility that it can spring the trading range.  If the Wyckoff Wave reacts through the lows at point D, it could be springing the trading range.  However, just penetrating the support isn’t enough.  The spring will only be confirmed if strong demand drives the Wyckoff Wave back into the trading range on strong and increased spread and volume.

Remember the action at point Z.  There was not strong demand after the reaction to point Z and while the Wyckoff Wave put in a nice move to point A, the rally did not continue.

It is also possible we have not seen the actual support levels of the new trading range.  Remember, that old resistance line from last spring is lurking just below the bottom of the trading range at point D.  It is possible the support area of the trading range could end up between that line and the lows at point D.

We do not appear to be in a position where many trading opportunities abound.  While short-term traders should be alert for a spring, unless it happens, Wyckoff traders should continue to look for good candidates and enjoy the spring weather.

Intermediate-term traders who are looking to add to their positions can certainly do so in this area.  I would suggest waiting until the Technometer moves into an oversold condition.

Finally, in this discussion we have not mentioned the Optimism – Pessimism Index.  That is because it is in reasonable harmony with the Wyckoff Wave and is not presenting any significant divergences.  There is a minor positive divergence when compared with point B, but a reaction could easily and quickly eliminate the divergence.  If the Wyckoff wave rallies to test point A, it will be important to watch the O – P Index to make sure the effort of the O – P Index matches a result of the Wyckoff Wave.

Did We Fall Back Into The Creek?

The stock market is always surprising us.  There are times when it can move in a completely opposite direction than what was expected.  However, if we go back and look at what happened using basic Wyckoff, these supposed contradictions can make a great deal of sense.

Just one week ago, it appeared the Wyckoff Wave and the entire stock market was ready for a significant advance.  The Wyckoff Wave, on its way to point A,  had dramatically penetrated the trading range on good price spread and volume.

The Wave became dangerously overbought at point A and we all expected a reaction.  This is a normal situation, as illustrated by Bob Evans’ wonderful story about the creek jump.  The little boy most definitely jumped the creek and happily landed at point A.  He was quite proud of his achievement and went back to look at the creek he had just jumped over, before he continued his journey.

On the first part of trip back to the creek (marked on the attached chart with red arrows), things looked promising.  While supply was certainly present during the first day, it appeared to dry up as relative price spread and supply was reduced.  The second day, marked by the little arrow, had reduced spread and volume.  On the third day, there was an intra-day failure to the upside.  This, coupled with the reduced volume, suggested a lack of supply.

There was also a positive divergence with the Optimism – Pessimism Index when compared to point Z.

At this point, it appeared that the Wyckoff Wave could hold above the creek and begin to rally.  That didn’t happen.  Instead, the next day more supply came in and the Wyckoff Wave reacted back to and just into the creek.  While we did see increased spread and volume, which was certainly not a positive, the Wyckoff Wave moved into a dangerously oversold condition on the Technometer.  This was an indication that the reaction, most probably would not continue further into the creek bed and that we had even seen a Last Point of Support.

The next day (point B) the Wyckoff Wave put in an intra-day failure to the down side.  The reduced price spread and volume suggested a lack of supply.  In addition, a review of the intra-day waves showed good supply came in the afternoon.  The Technometer was still in a dangerously oversold condition.  It certainly looked like we were ready to rock ‘n roll to the upside.  The little boy had gone back to the creek, in a reasonably constructive manner, dipped his toe in the water and decided everything was just fine.  He was then ready to begin the rest of his trip.

It got off to a great start.  A strong gap opening to the upside, coupled with an increased price spread, suggested the rally had begun.  The slightly reduced volume suggested a lack of supply.  This condition is not uncommon at the beginning of a rally.  However, there was no follow-through.  Our daily commentary suggested that the Wyckoff Wave needed to go and go now.  That didn’t happen.

Instead the Wyckoff Wave reacted.  However, the reaction was still positive in nature as it was on reduced spread and volume, again suggesting a lack of supply.  However, if the market is going to move, it moves.  At this crucial stage there should be no dillydallying.  If the market hesitates, we have an OOPS.

The OOPS came in a day before point D.  All of a sudden we had a widespread and slightly decreased volume to the down side.  Demand was withdrawn.  That weakness was followed through at point D where the Wyckoff Wave went all the way back across the creek.  For some strange reason, the little boy decided one last time to revisit the creek and this time, fell in.

What went wrong?  While hindsight is always 20/20, there are a couple of things that need to be revisited and added to our information base.

1.  It appeared that the Wyckoff Wave sprung the trading range at point Z.  However, as was mentioned in this column at the time, the rally off the spring (marked by blue arrows on the attached chart) was not strong.  A spring should spring.  This one certainly did not.  This is an indication of trouble and should have been filed away in our mental databases.

The concern was mostly mitigated by the strong breakout to the upside (jump across the creek).  As I look back on this I mentally canceled out the poor performance of the spring after the strong break out.  This goes down as a lesson learned.

2.  On the backup (marked by the red arrows), the relative volume was higher then it should have been.  This is a bit of Monday morning quarterbacking.  The relative reduced price spread and volume still looks like a positive drying up of supply.  However, on the day between the last red arrow and point B, we did see some supply come into the market.  However, this was also the day the Technometer moved into a dangerously oversold condition.  While this would certainly suggest the market would rally, and it did, this was an important day.  It said supply was still present and wasn’t dried up.  This could suggest we would not put in a Last Point of Support ( LPS).

Despite that, as a short-term trader, I was happy to take a short-term long position to the upside.  As an intermediate term investor, I was also happy to add to existing positions.

Even though my short-term positions were closed in just a few days, small profits were taken.  As an intermediate term investor, I still feel this is a good level at which to add to my intermediate to long-term portfolio.

What does this mean for the future direction of the stock market, as represented by the Wyckoff Wave?

There was an intraday failure to the down side at point D.  This suggests some demand has returned to the market.  However, there was no follow-through on Friday.  In addition, the Technometer has quickly moved into an overbought condition.  In addition, the Wyckoff Wave has created a short-term down trend channel.  There is a supply line drawn through points A and C.  A parallel support line has been drawn through B.  In addition, the Wave has weakened the intermediate term blue support line and is in the process of testing it.

Does this mean we are in for a significant reaction?  I don’t think so.  There is only a small count to the down side on the 100 Point & Figure chart and that objective has already been reached.  In addition, we have seen good demand come in at point D.

This would suggest that the Wyckoff Wave, while not ready to rally strongly, may well be prepared to move sideways until we see a new attempt at ending action.

For this scenario to succeed, it would be helpful for the Wyckoff Wave to weaken its short-term down trend channel.  Before that happens, there may be a small reaction to test point D.

It is not uncommon for a new trading range to begin just above an old one, when a jump across the creek fails

So far, we are still looking at accumulation and a potential strong rally to the upside.  A second trading range simply means more upside potential..

Are We Ready To Rally?

On the week ending March 16, 2012, the Wyckoff Wave broke through the resistance of the short term trading range or area of re-accumulation.  It reached a new high at point A and then began to react back towards the top of the trading range.

As Wyckoff students know, this is a reaction back to the creek and, if successful, will become a major Last Point of Support (LPS).  If the backup is successful, the Wyckoff Wave can be expected to rally and the bull market will continue.

There are several indications that suggest this scenario will be successful.

1.  As the Wyckoff Wave reacted, the price spread was relatively narrow and the volume was reduced.  The reduction in volume was not as great as I would’ve liked to have seen it, but it was indeed reduced.  An analysis of the intraday waves, from the daily data report, shows that demand was present and supply was drying up.

2.  While the Wyckoff Wave, like the little boy in Mr. Evans’ delightful analogy, who dipped his toe back into the creek, the Wave did not react far enough to be swept away back into the trading range.  This, of course, is assuming that the reaction is completed.  That will only be confirmed if the Wyckoff Wave rallies strongly early next week.

3.  The Wyckoff Wave has respected the ½ point of the rally from point Z to point A.  This halfway point is marked on the attached chart.  It is always a bullish indication when an index or an individual stock holds above the halfway point on a reaction.

4.  There is a short-term positive divergence between the Wyckoff Wave and the Optimism – Pessimism Index.  This week, as the Wyckoff Wave reacted, the O – P Index fell below its low at point V.  This suggests that the amount of effort to the down side has not produced the expected results.

5.  The Technometer has become dangerously oversold.  The Friday reading of 33.9 is the lowest it has been since point P and this suggests the Wyckoff Wave is extremely vulnerable to rally.

6.  While the Force Index has weakened its support line, it is not generating strongly negative numbers.  An extremely negative Force Index can reduce or cut short the expected rally suggested by the Technometer.

It is important to understand that the readings of the Technometer and Force Index are not mechanical indicators to buy or sell, but help confirm or question the deductions we make from the action on the vertical line chart.

If the Wyckoff Wave is prepared to rally, how far will it go?

A count taken along the 31,500 line of the Point & Figure chart gives us a maximum objective of 34,700.  There is also a minimum objective of 33,800 taken from the bottom of the trading range.  This is another stepping stone count on the way to its long-term objective area beginning at 37,200.  This objective is obtained by taking a count along with 24,800 line from the spring at point H to the buying climax at point X.

While the above establishes good justification for a continued rally, it is not a guarantee. The Wyckoff Wave is in a position where it must go and go now.  Next week, it must rally and take out the highs at point A and confirm that the uptrend channel, drawn through support points H and P, with the parallel supply line drawn through point K is, in fact, a valid up trend channel.

If the Wyckoff Wave does not rally strongly and decisively, it runs the risk of returning to the trading range and continuing its sideways movement.

It is also important to keep an eye on the Technometer.  If the Wyckoff Wave rallies poorly, it is quite possible the Technometer will quickly become overbought, while the Wave has not broken out into new high ground.  This would be a negative condition at just the wrong time.

While it is nearly impossible to identify exact turning points, the risk/reward ratio seems good enough to allow Wyckoff students to take both short term and intermediate to long term positions.  Actual or mental stops should be placed below the halfway point of the last rally and the lower edge of the creek.  The creek bed should be marked on everyone’s charts of individual stocks.

Wyckoff teaches us there are only a few times during the year when it is optimal to take positions.  While there is always risk, this appears to be one of them.  Select your best candidates.  Take positions.  Watch your stop orders carefully.

A Jump Across The Creek.  What Does That Mean & What’s Next?

After rallying off the lows at the bottom of the trading range (point Z), the Wyckoff Wave ran out of steam and moved sideways for a couple of days.

In last week’s Market Letter I questioned that point Z was a spring.  My logic was that the expected bounce from the spring (good demand coming into the market) didn’t occur.  While I still stand by that conclusion, the stock market, as represented by the Wyckoff Wave, still had the opportunity to rally further.

After rallying off the bottom of the range, the Wyckoff Wave was certainly entitled to test the top of the trading range.  In addition, the Technometer moved into a clearly oversold position.  Finally, it certainly appeared the entire trading range was much more accumulation than distribution.

Last Monday, the Wyckoff Wave continued its negative response from point Z.  The day’s market action is marked by the red arrow.  The decreased spread and volume suggested demand was being withdrawn.  However, the Technometer moved into a dangerously oversold condition.  Its reading was 35.61.  A reading of 38 is considered very oversold.

In last week’s market letter, we reported the Technometer was also in an oversold condition.  At the time it was 38.66.  A decrease of three points, on Monday’s poor quality rally, gave the Wyckoff Wave another opportunity to test the top of the trading.  As I mentioned last week, while the price spread and volume relationship test indicates supply and demand, the Technometer can be a very useful tool in identifying potential turning points.

The next day, Tuesday, it finally happened.  After weeks of a dull trading range, the Wyckoff Wave sprang into action and broke out of the trading range to the upside.  This breakout is also called a Jump Across the Creek, in honor of Mr. Robert Evans’ wonderful story.

Mr. Evans tells of a little boy who comes to a Creek and wants to get to the other side.  He’s going to jump across the water, so he starts to run, leaps into the air and lands safely on the other side.  That’s what happened on Tuesday.  Look at the dramatically increased price spread and the high-volume.  Demand came into the market and propelled both the market and the little boy out of the trading range and into new high ground.

However, this is only half the story.  The little boy was so pleased with his success that he decided to go back to the Creek and look at what he had accomplished.  If the little boy was careful, he only went back to the creek bank shore, looked around and then continued his journey away from the Creek.  Sometimes, he wasn’t careful and stepped into the water.  Then, if he wasn’t careful he would get caught up in the current and be swept back to the far bank.

As of today, Mr. Evans’ analogy is only half complete.  The Creek has been jumped, but we can still expect a reaction back to the creek bank.  This will determine whether the jump was successful or if the Wyckoff Wave will fall back into the Creek and return to the trading range.

Every Creek has to banks.  I have drawn the Creek on the attached chart and shown both banks.  Remember, the boy can get a little wet and still be able to continue his journey.

So, where are we now?  After the Creek jump, supply did appear and the Wyckoff Wave’s advance has slowed.  Then on Friday (the last day shown on this chart), good supply came into the market.  The Wyckoff Wave experienced an intra-day failure to the upside.  It closed at the bottom of a narrower trading range on increased volume.  This suggests the backup is about to begin.  This observation is enhanced by the dangerously overbought Technometer reading.  It is now 56.38.  Anything over 50 is considered overbought.

Based on the above, it is reasonable to assume that the Wyckoff Wave will react this week and return to the Creek.  The question is, will it hold at the near bank or fall back into the Creek and return to the trading range.

If the Wyckoff Wave holds at or near the bank of the Creek (marked by the support/resistance line drawn from point W), we will see a major Last Point of Support.  This will change all the trends to up and most probably, signal the next phase of the bull market.  If this happens, we will see reduced spread and volume and a dramatically lower reading from the Technometer.  It will also be helpful to watch the Optimism – Pessimism Index to see if it is able to continue its relative strength relationship with the Wyckoff Wave.

If the Wyckoff Wave reacts on good spread and volume, this increases the probability it will fall back into the Creek and we will begin another phase of the trading range.

On Friday, the Wyckoff Wave closed at 31,118.  A count from the spring on October 4, 2011 back to the original selling climax, gives the Wyckoff Wave an objective of 37,200.  This does not include any counts taken from tests of the spring or Last Points of Support.  These accounts will increase the objective substantially.  While it is best to stick with conservative counts, it appears likely that if this bull market continues, the Wyckoff Wave has the opportunity to move into new all-time highs.

It is also important to note that support line H – P is converging with the support/resistance line drawn through point W (edge of the Creek).  This support line has been respected and may well become the support line of the long-term up trend channel.

While I drew this line after the Wyckoff Wave reacted to point P and put in a higher bottom, I was reluctant to call this an intermediate uptrend for the following reasons.

The reaction to point P took the Wyckoff Wave through the Creek and back into the trading range.  The price spread of the reaction from point L was reasonably wide and the relative volume didn’t decrease.  Finally, the very low volume at point P came on the day after Thanksgiving, when the market was only open for three and half hours.

However, this uptrend channel has held and, if we see a good Last Point of Support on the expected reaction, will become the long-term up trend channel.

This week will be most interesting and we will be receiving some very important Wyckoff signals.

Did We Spring The Trading Range?

For the last six weeks the Wyckoff Wave has confined its price movement to a relatively narrow trading range.  It has been a frustrating period as the Wave, and the stock market in general, simply seems content to move sideways without effort or enthusiasm.

While this is difficult for intermediate and long-term investors, it is driving short-term and swing traders crazy.  They have had no good opportunity to enter the market and take either a long or a short position.

Then, last Tuesday, at point Z, the Wyckoff Wave penetrated the trading range on good spread and volume.  It appeared that something was about to happen.  Would we see the long-awaited spring of the trading range, or was the Wave going to break out to the down side in a fall through the ice?

If we were seeing a spring, then the next day good demand would come into the market.  Short-term positions to the upside could be taken and intermediate term investors could begin to either identify good prospects or even add to existing positions.

If we were seeing a fall through the ice, short-term traders could look for opportunities to the down side on a rally back to the ice (support/resistance line drawn from V).  There was enough count on the 100 Point & Figure chart to take the Wyckoff Wave back down to the 29,400 level. That is in the area of the support/resistance line drawn from point K.

If we had seen reduced spread and volume, indicative of a drying up of supply, the bottom of this reaction could become an important Last Point of Support (LPS).

In other words after a long quiet stretch, perhaps the market was beginning to move and new trading opportunities would abound.  So what happened?

On the day following point Z, supply did not commit and the Wyckoff Wave did not break out of the trading range or fall through the ice.  Instead it rallied.  So, was this a spring?

The reason a spring is called a spring is because after penetrating the bottom of a trading range it acts like a spring and bounces up.  In the stock market, the way things bounce up is for demand to strongly enter the market.  We saw a classic example of this at point H.  This was the spring at the end of the initial trading range. As you can see on the attached chart, the Wyckoff Wave opened lower (right at the bottom of the trading range), reacted some more and then look what happened.  Demand came in and the Wyckoff Wave rallied strongly and closed at the top of a wider price spread.

This was a classic spring and many Wyckoff traders jumped all over this and went long during the trading day.  Many of them are still holding on to those positions.

So, how does that wonderful spring compare to this week’s action at point Z? Well, the next day’s rally was on reduced spread and slightly increased volume.  That is certainly not the definition of demand and, in addition, suggests that some supply was present.

The next day was even worse.  The price spread was narrower and volume substantially decreased.  This is indicative of a lack of demand.  There was no bounce in the spring.

Finally on Friday, the Wyckoff Wave experienced an intraday failure to the upside.  It closed near the bottom of a reduced price spread on slightly increased volume. Again, this suggests some supply was present. After three days, the expected demand had not appeared.

In light all this, can we honestly call the action at point Z a spring?  I don’t think so.  The two characteristics of a spring are penetration of the support line and bouncing up on good demand.  Patently, the second characteristic has not been present.  This would suggest that the Wyckoff Wave is not ready to rally and will, most probably, continue in the trading range with point Z merely establishing a new phase.

However, nothing is easy in this market.  On Friday the Technometer reading was 38.66.  This number suggests a seriously oversold condition. In addition, the Optimism – Pessimism index has reacted and is now weaker than the Wyckoff Wave.  This has created a positive short term divergence with points Z and X. These are positive indications.

The other Wyckoff indicator, the Force Index, is at its lowest level since late November, 2011.  This would suggest that any rally would be difficult to sustain. This is not a positive indication.

While the Technometer and Force Index are excellent tools, they are not mechanical indicators and should never take the place of the price and volume analysis we have all learned as Wyckoff students.  It is a major mistake to look at an oversold condition on the Technometer and, with only that indication, automatically expect a strong rally.

So, where do we go from here?  It would appear to me that the Wyckoff Wave seems to be content to continue in the trading range.  While it can certainly attempt to continue its rally towards the top of the trading range, the presence of supply and the negative Force Index suggests it will be difficult for the Wyckoff Wave to breakout to the upside.

There is a possibility that the Wave can react again and spring the trading range.  However, the oversold condition of the Technometer would seem to make it difficult for this to happen.

The next question is are we in a period of accumulation or is this trading range distribution?  While the actual answer will come with the ending action, signs point to accumulation.  Accumulation is most often a quiet, dull time.  Price spreads are narrower and relative volume tends to get smaller.  Therefore, I would expect that ending action, for this trading range, will come in the form of a spring or breakout to the upside.

In the meantime, this is a great opportunity to identify new candidates and be prepared to act when the time is finally right.

Trading Ranges and Future Directions

The first order of business this week is to wipe a little egg off my face.  Patently, I was incorrect about the expected move to the upside.  I was a bit too aggressive for my own good and simply got caught.  Over the years, I have seen many significant moves begin with the subtle change I wrote about last week.  Unfortunately, this wasn’t one of them.

The most important item in last week’s commentary was that the Wyckoff Wave did indeed experience a change in character. This changing character and the continuing, rather dull, sideways movement of the Wyckoff Wave now suggests that instead of the reaction that was initially expected we are seeing a period of re-accumulation.

Initially, when the Wyckoff Wave up thrusted the old resistance at point U, it appeared the Wave was prepared to react back towards  support line H – P and the previous support/resistance line drawn from point K  This didn’t happen and the sideways movement began.

This sideways movement formed a fairly tight trading range with the support line drawn through point V and a resistance line drawn through point W.  Now the question became, were we looking at re–accumulation or some distribution.

I felt that the first important clue came at point Y when, for the first time, strong supply did not come in as the Wyckoff Wave reached the top of the trading range.  Instead, there was a lack of supply.  Then demand came in at point Z. The Wyckoff Wave experienced an intraday failure to the down side, rallied nicely throughout the day and closed near its high.

However, the Wyckoff Wave was unable to penetrate the resistance. The next day, marked at point A, saw demand dry up at just the wrong time.  This was where I expected the Wyckoff Wave to drive through the resistance and continue its rally. This lack of demand was also a signal to short-term traders to either close their positions or watch their stops very closely in anticipation that the market would not move strongly to the upside.

Any short term long positions should’ve been closed on the day following point A as it was definitely apparent that the market was not going to make an immediate strong move up.

The Wyckoff Wave then continue to move sideways for the rest of the week.  However, as you can see on the vertical line chart,  with the exception of one day that is marked by the up arrow, supply did not come in and even on that day it was not sustained.

Even though the bottom of the range is marked by the lows at point X, for the last 10 trading days the Wyckoff Wave has stayed within a much smaller range. The price spread has been narrow and the relative volume has decreased. As mentioned above, this is almost always a sign of accumulation or re–accumulation.

Now that we have identified the trading range and made an assumption that it is accumulation, the next step is waiting for ending action.

It is most likely that the ending action will be in one of two forms.
1.  It can be a spring.  The Wyckoff Wave can spring the entire trading range.  It also may simply spring the lows following point Y. Remember the spring can be a major shakeout or a number one spring, a number two spring or a number three spring.  The first two need to be tested.  A number three spring does not have to be tested.

2.  The Wyckoff Wave can rally through the resistance at the top of the trading range.  In Mr. Evans terminology, this is called jumping the creek.  This would also be a Sign of Strength (SOS).  There would then be a backup to the resistance (creek) for a Last Point of Support (LPS).

If this happens, how far can the Wyckoff Wave advance.  While the count is not yet complete, the attached Point & Figure chart gives us a maximum objective of around 2,900 points.  This would take the Wyckoff Wave to around the 33,000 level.  This is within the objective range taken back in the original trading range. There the minimum objective was 32,200.  The maximum objective was 37,002.

It is also important to remember that if this happens, the trading range was re-– accumulation and we could see other periods of re-accumulation before the end of the rally.  In addition, there may well be a Sign of Strength and a Last Point of Support that would give us a higher objective.

We should also pay attention to the H – P support line, which could well become the support line of an intermediate term up trend channel.  Notice how the Wyckoff Wave is approaching this support line.  Based on the relative strength of the Wyckoff Wave, one could expect the ending action will occur at or before the Wyckoff Wave reaches this line.

Finally, while there is a good possibility the scenario described above will take place, a good trader always assumes and prepares for other possibilities.  In this case, it would be a reaction back towards the resistance/support line drawn from point K.  If this happens, it can still be a bullish indication and if supply dries up there will be an important Last Point of Support.

An upthrust of the trading range would be a good indication that this scenario would play out.

However, if this does happen, the Technometer will quickly become oversold making the Wyckoff Wave vulnerable to a rally.

While every day this trading range looks more and more like accumulation, it is best to wait for ending action before entering the market on a short-term basis or taking additional intermediate or long term positions.

Tiny Changes Can Lead To Significant Moves.  Are we seeing one now?

We are in a traders market.  The stock market, as represented by the Wyckoff Wave, has moved sideways for three weeks.  The price spread has been relatively small and the volume not overly impressive.

The intermediate and long-term bulls don’t really have a dog in this hunt.  They can simply watch the supply versus demand battle from the sidelines. If there is a reaction back towards the H – P support line, it presents an excellent opportunity to add to or discover new positions.

The short term day or swing traders don’t have that luxury.  They need to find some clue as to the stock market’s next move and take their positions.  This is not easy stuff and often these short term opportunities can be missed.

The lesson here is to discover a subtle change in character.  A quiet tip that the market is ready to make its next move.  While either direction works for the short-term trader, determining that direction and timing the trade is critical.

In this exceedingly frustrating market, have we seen a subtle change in character that will give us an important clue as to the stock market’s next definitive move?

It is quite possible this subtle change of character appeared this week.  I probably should have waited a week to write about this topic.  That way, if the market moved as expected I would appear to be reasonably smart.  If it didn’t, I could ignore this topic altogether.  However, since I’m not that smart, and I think this is an important point, I will press on.

I have attached two charts to this blog post.  The first is a daily chart of the Wyckoff Wave that covers the past few months.  The second is the same daily chart, but condensed to only present the market action from point U through last Friday.  The first chart is primarily to help reference the second.

Let’s begin our study at point U.  This is where the Wyckoff Wave up thrusted the important long-term resistance line drawn from the May 2011 highs. Instead of driving through the resistance on good demand, the Wave penetrated the resistance and then closed below it.  This was done on decreased spread and increased volume.  Supply came into the market and the days action was a classic upthrust. Conventional wisdom would then say that the Wyckoff Wave would react back towards the H – P support line or even to the old support/resistance line drawn through point K.  That didn’t happen.  The day following point U brought a lack of supply in the form of decreased spread and slightly decreased volume. Then some minor demand returned and the Wyckoff Wave rallied to test the upthrust.  The test was completed at point W.  However, because the highs at point W were higher than at point U, the test was of poor quality and needed to be repeated.

Once again supply did not come into the market and the Wyckoff Wave reacted slowly over the next eight days to a low at point X. Let’s review what has happened.

The Wyckoff Wave saw supply come in at the 31,400 mark (point U).  It then reacted to point D at the 30,750 level.  While the rally to point W was slightly higher, supply again appeared at the 31,400 level.  The eight day reaction to point X saw demand again come in at the 30,800 level.  We have now established a minor trading range with a resistance level at between 31,000 and 31,500.  The support level is at 31,750.  I had originally drawn in an apex formation, but, after further review, think the trading range description is more correct.

The test of the upthrust was of poor quality.  The test of the lows at point V was of good quality.  The reaction to point X held above point V.

At both points U and W, supply came into the market.  Again, this was where the expected reaction could have taken place.  However, Demand kept returning and preventing the reaction.  However, every time the Wyckoff Wave attempted to rally, supply came in and stopped the small advance.  While the weak test at point W and the strong at test point X were minor positive indications, it still seemed that the supply would rule the day and we would get a nice reaction back to a significant Last Point of Support.

As I reviewed the day’s action at point X, I felt that based on the intra-day failure to the upside, increased price spread and only slightly reduced volume that this was the beginning of the expected reaction.  I was wrong.  Once again, demand came in and the Wyckoff Wave rallied to point Y.

The day’s action at point Y was not particularly bullish.  There was an intra-day failure to the upside, decreased price spread and only slightly decreased volume.  While some supply was present, it was not as strong as at the previous size.  In fact, the days action suggested a lack of demand rather than supply. However, the door was open for supply to come in.

It didn’t and here was the subtle signal.  On the day following Y, the Wyckoff wave reacted on decreased spread and decreased volume.  Instead of supply coming in to drive the Wyckoff Wave down toward the bottom of the trading range, supply dried up.  Supply didn’t come in as expected at the 31,000 to 31,500 levels.  Instead we saw a lack of supply.

The character of the market had changed.  Supply should’ve come in, but it didn’t.  This means something.  It means even more when you go back and look at the action of the trading range after the upthrust at point U.  While there were some bullish indications, they weren’t enough to draw firm conclusions.  However, when looked at in light of this change of character, they become more significant.

The next day, marked by point Z, the Wyckoff Wave experienced an intra-day failure to the down side and closed, on decreased volume, near the top of a wider price spread.  Once again we have a lack of supply right where supply should’ve come in.

It appears that demand was taking control of the market. However, nothing is easy.  It would’ve been terrific if strong demand had come in on Friday, but it didn’t.  The reduced price spread and volume suggested a lack of demand.  However, Friday’s market action produced a new high for the Wyckoff Wave and, once again supply was not present.

In addition, we are able to draw a new short-term uptrend channel with support line X – C and a parallel supply line drawn through Y.  If my scenario is correct, the market will test and possibly penetrate the supply line early next week.

Thursday, in my daily market letter to Wyckoff Pulse of the Market Charting Service subscribers, I advised taking short-term positions to the upside.  This is a fairly aggressive recommendation as it is based on a change of character and not traditional Wyckoff ending action.  However, over the years I have seen many strong market moves begin with these subtle character changes.

What if I am wrong?  If so, several things could happen.

Perhaps the trading range is not finished and there will be more definitive ending action.  If that happens there will be a reaction.  Since market indications are more bullish than bearish, we could see a ending action in the form of a spring.

We can still certainly see a reaction back to the area of the support line or even the old support/resistance line mentioned above.  There is certainly enough count on the 100 Point & Figure chart to justify that move.

Regardless, the new support line will be penetrated. That will be a signal for the short term bulls to close their positions and wait for a new opportunity.  Such is the nature of the business.  The risk is small.  The gain can be significant.

Now we will see if the coming week makes me look reasonably smart or if I end up with egg on my face.

The Wyckoff Wave – Can we learn from recent history?

This week, just like the last two, the Wyckoff Wave moved sideways in a very narrow trading range. After having what appeared to be an upthrust at point U (on the daily chart) and shown as S on the weekly chart, the Wyckoff Wave was unable to substantially weaken the short term support line P – R (shown on the daily chart).  Enough demand was present to accept all the supply that came into the market and the result has been a three-week standoff.

This past week has seen the Wyckoff Wave move within an apex formation.  On Wednesday, marked by point X (daily chart), it appeared the Wave was going to leave the trading range to the down side.  That didn’t happen and on Thursday and Friday the Wyckoff Wave rallied back to the top of the range.  Now, both the support and supply lines of the apex have been weakened.  Point X was not a spring as it did not penetrate below the low at point V.

Where do we go from here?  The short-term uptrend channel has certainly been weakened.  The Technometer was overbought on Thursday and nearly overbought on Friday.  The Optimism – Pessimism Index has formed a short-term negative divergence with point U and W.  The Force Index is testing the support line of its short-term uptrend channel.  These are the negatives that can certainly justify a reaction scenario.

We also may be looking at some absorption.  Every time supply appears, it is countered by demand.  An argument can be made that demand is so strong that the expected reaction will simply be a sideways movement and, at any time, the Wyckoff Wave will resume its upward movement.

Either one of these scenarios is a possibility and all of us are looking for clues in each day’s market action to determine the market’s future direction.

When this happens there is a tendency to focus on the very short term direction of the market and ignore the larger picture.  This loss of perspective can often cause us to miss important signals about the future direction of the stock market. Been there, done that.

When this happens to me, I find it helpful to go back and look at the longer review of the Wyckoff Wave.  This week I have attached both the daily and weekly charts as well as the Point and Figure chart of the Wyckoff Wave.

Since the end of the 2008 bear market, the Wyckoff Wave has been primarily bullish. It rallied off the bottom of the bear market (not shown on this chart), went through a trading range shown on the weekly chart from point A to point B and then put in a nice rally to point G. The importance of that rally was that it exceeded the halfway point of the bear market and gave the Wyckoff Wave an opportunity to regain even more of those losses.

Having exhausted its cause, the Wyckoff Wave went through a distribution period and then reacted sharply.  Again, after meeting objectives, it climaxed at point X and began a new trading range. The trading range’s ending action came in the form of the spring at point H.  It is then appropriate to call the trading range to the accumulation. Therefore, we can take a count on the Wave’s 100 Point & Figure chart.

The count is taken at the 24,800 line.  While there were other phases, these have been met, leaving us with two objectives.  The first phase from point H to point Z gives us a count of 8400 and an objective of 33,200.

The full count, all the way over to the selling climax at point X, gives us a count of 12,400 and an objective of 37,200.  On Friday the Wyckoff Wave closed at 31,445. This would suggest we still have more count to be worked out.

Let’s turn to the weekly vertical line chart of the Wyckoff Wave. After the spring at point H, the Wyckoff Wave had a Sign of Strength to point K.  Then things got a little confusing.  The Wave backed up to point L at the top of the creek drawn through point A and then rallied to point M. One would’ve thought this was the beginning of the markup phase.  Not so.

The Wyckoff Wave then reacted back into the original trading range and saw support at point P.  Notice how this support was also at the support line of the long term down trend channel that was formed way back in last spring’s distribution area.  It is important to remember that on a long-term basis that down trend channel still comes into play.

Was point P a major Last Point of Support?  Point P was reached on widespread, but decreased volume.  The decreased volume was a little deceiving as point P was reached on the day after Thanksgiving, which was a partial trading day and therefore, had extremely low volume.

The Wyckoff Wave rallied strongly off point P.  We certainly had a higher bottom so it would be appropriate to draw trend lines through points H and P, with a parallel supply line drawn through K.  Because of the action surrounding point P, it is difficult to call it a last point of support, but the trend lines still should be in effect.

While the Wyckoff Wave has certainly rallied from the spring at point H, we have not yet seen a true last point of support. As evidenced by the recent market action, supply has not dried up.  The Wyckoff Wave has also weakened its short-term up trend channel, but did not confirm it had been broken.  It is also moving towards the H – P support line on the weekly chart.

This sideways movement has also created a cause on the Wyckoff Wave 100 Point & Figure chart. Presently, there is a 210 point count on the 31,400 line, giving us an objective of 29,300.  If this count is taken from the 31,500 line the objective becomes 29,400.  If this objective is worked out to the down side,  it takes us back to the support/resistance line drawn through K. If this was done on reduced spread and volume, we would have the long-awaited last point of support.  We would also have a huge upside objective.

Will the Wyckoff Wave react or will it simply absorb the supply and move toward its yet to be reached objectives?

I would suggest there is still a fair amount of overhanging supply that needs to be transferred to stronger hands.  Many investors are still holding positions taken before the 2008 bear market and may feel, especially based on domestic and international conditions, that this is the time to finally get out.  In addition, those who bought them last spring, just before the reaction to point X, have a chance to get out even.  These basic Wyckoff principles suggest the reaction scenario still has the highest probability.

Regardless, it certainly appears the Wyckoff Wave is going to go higher before any substantial reaction.  It is also helpful that the questionable economic condition creates negative news and feelings about investing in the stock market.  It is in times like these that strong hands pounce and money is made.

This week the stock market, as measured by the Wyckoff Wave, accomplished very little.  Until last Friday it had moved sideways in a narrow trading range.  Then on Friday (marked by a red arrow), the Wyckoff Wave dipped below the long-term resistance line drawn from the tops of last Spring’s highs at point G. However, due to the significant gap opening to the down side, the price spread was slightly reduced.  In addition, the volume was less than the previous day.  This suggests a lack of supply.  This market action did not produce the strong supply that normally would be expected to come into the market as it began to react.

What has happened over the past couple of weeks and where can we expect the market to go in next week and weeks to come?

I don’t know about you, but this has been a difficult couple of weeks in attempting to analyze and establish what the market is doing and where it is going.

Things seemed fairly normal at point U, when the Wyckoff Wave up thrusted the above-mentioned long-term resistance line.  The Wyckoff Wave then reacted poorly and two days after the up thrust encountered demand as it reached the P – R support line of the short term uptrend channel.  I have marked this point as V on the chart.

The following day the Wyckoff Wave continued its attempt to rally.  However, it quickly ran into supply and reacted.  This reaction weakened the P – R support line.  This failed rally would lead one to conclude that the Wyckoff Wave would continue to react down towards a significant resistance area.  This area includes the support line H – P, the resistance line drawn through point K and, quite significantly the long-term supply line drawn through points G & S.  This is significant because once the supply line is confirmed to be broken, the long-term trend of the Wyckoff Wave will be changed.

Short term traders who had taken short positions on the up thrust were delighted.  This was also good news for intermediate and longer term traders to the upside, who were looking for an important Last Point of Support and a confirmed breaking of the long-term supply line mentioned above.

Unfortunately, there was an OOPS.  As often happens, the Wyckoff Wave ignored what it was expected to do and instead rallied to point W.  However, an examination of the rally does not offer a very bullish scenario.  The first day (two days after point V) saw demand coming in during the day but, at the end of the day supply appeared, resulting in a poor close.  The next day, decreased volume along with a narrowing price spread suggested a lack of supply and perhaps the Wyckoff Wave could continue to rally.

On the final day of the rally to point W, the Wyckoff Wave rallied, but on decreased price spread and increased volume.  Supply came right back into the market.

Although up thrusts do not need to be tested, was this a poor quality test of the up thrust at point U?  Based on the poor rally to point W, the bears could come to that conclusion and feel more sanguine about their positions.  However, as mentioned last week, if any of those short positions had also rallied above the up thrust levels, good trading discipline dictated they needed to be closed.

So now, was the Wyckoff Wave ready to react?  It was not and apparently not ready to stop messing with our minds.  The day following point W was a reaction on reduced price spread and reduced volume.  Again, this suggested a lack of supply, giving the Wyckoff Wave another chance to rally.  This takes us to point X.  Here the Wyckoff Wave tried to rally briefly in the morning and then reacted.  The reaction again weakened the short term support line and by two o’clock in the afternoon all the bears were celebrating.  Then, demand came in and the Wyckoff Wave closed higher on sustained volume.  Were we experiencing another OOPS?

Again, the Wyckoff Wave was unable to follow-through and on the following day it experienced an intra-day reaction. However, once again demand came in late in the day and the Wyckoff Wave only closed slightly lower than the close at point X.  It did, for the first time stay completely below the short term support line.  The strong demand at the end of the day as shown by the increased volume, once again put the Wyckoff Wave in a position to rally.

The potential rally did not happen.  Once again, the Wyckoff Wave experienced supply.  It reacted and closed near the bottom of a slightly narrower price spread.  However, and there have been a lot of howevers, the price spread and volume still suggested some demand was present.

It is important to note that every time the Wyckoff Wave reached the general area of 31,400 supply came in.  It is also important to note that since point K, the Wyckoff Wave has left the short term up trend channel to the down side and has been unable to return.  This is an important weakening of the short term uptrend channel.

This brings us to Friday’s market action. There was a substantial gap opening to the down side.  The gap opening and the subsequent market action caused the Wyckoff Wave to break through the long-term resistance line for the first time since point V.

Once again, the bears were enthusiastic.  However, after the gap opening, there was limited follow-through and supply and demand fought throughout the day.  Demand landed the last punch as the Wyckoff Wave closed near the day’s opening price.  The reduced price spread and volume suggest that Friday’s market action resulted in a lack of supply.  This makes the Wyckoff Wave vulnerable to at least an attempted rally on Monday.

So here we are.  11 days of sideways movement on relatively narrow price spread.  Supply has consistently come in at the 31,400 level and, until Friday, demand has appeared at the 31,200 level.

Some would say we are experiencing absorption.  Usually absorption produces wider price spreads as the market takes in the available supply. While this scenario is always possible, the last 11 days have not really felt like adsorption.

It is important to remember that at point U the Wyckoff Wave reached its highest level following the 2008 bear market.  As evidenced by the recent market action, there is still good supply ready to be dropped back into the market.  As I mentioned a couple of weeks ago, the supply not only comes from investors who saw huge profits disappear in the 2008 market reaction, but also from investors who were bullish through last spring and experienced last summer’s reaction and the subsequent trading range.  They are hoping to exit at least even or with a small profit.  I would suggest the market is moving rapidly into stronger hands, but the process is not yet complete.

If Friday’s market action is the beginning of a reaction down to test those important resistance points, let’s look at the 100 Point & Figure chart of the Wyckoff Wave.  It is the second page of the attached Adobe Acrobat PDF file.

There is a count of 14 on the 31,400 level.  This gives us an objective of between 31,000 and 130,000 on the Wyckoff Wave.  If the Wyckoff Wave reacts and reaches the support line H–P, it will most probably be right in the objective area.

Even though demand has not left the market, in my opinion, the odds favor the Wyckoff Wave reacting.  Even with Friday’s reaction, the Technometer is still in an overbought condition.

If it does this on reduced spread and volume and dries up the remaining supply, the intermediate and long-term trend of the Wyckoff Wave will change to up and the long-term up trend channel that I have drawn through point H & P, with a parallel supply line drawn through point K, will become the dominant channel in, what should be, an exciting bull market.

Trading the Unexpected. Discipline is Everything.

This week, the stock market, as measured by the Wyckoff Wave traded sideways and, for the most part showed relative weakness.  A week ago Thursday, the Wyckoff Wave up thrusted an important resistance level, the highs from last spring.  Unlike most up thrusts, the Wave did not react, but moved sideways. Strong supply did not come into the market.

The Wyckoff Wave would either open lower and put in a weak rally during the rest of the trading day or it would open strongly to the upside only to see supply come in and stop the rally.  It seems the Wave was unable to go up and unable to go down.  It also tested and slightly weakened the P – R support line of the short term up trend.

The Optimism – Pessimism Index was in an overbought position relative to its short term up trend.  The Force Index was weak and declining.

Last Monday, the Technometer, which had been in an overbought condition several times on the rally to point U, again became slightly overbought.

By Thursday, the Wyckoff Wave was also approaching an apex.  The apex was formed by last spring’s resistance line and the short term support line P – R.  Usually when a stock or an index moves into an apex position it will move strongly in one direction.  Strong supply or strong demand will appear and an existing trend will be confirmed or a new trend established.

Then, on Thursday, the Wyckoff Wave reacted on reduced spread and volume.  It also, once again slightly weakened the support line P – R.  The day’s action suggested a lack of supply.  Was this an indication that the Wyckoff Wave was going to rally off last spring’s support/resistance and continue the rally?  Was the Wyckoff Wave going to move strongly to the upside or would the relative weakness of the week’s action cause the Wave to react back down towards the support/resistance line drawn through points K and Q?

A definitive answer should have arrived on Friday, but it didn’t.  While the Wyckoff Wave experienced a large gap opening to the upside, there was no follow-through.  In fact, Friday’s action produced decreased spread and increased volume.  This is indicative of supply being present and certainly not the best way to begin a strong rally.  However, the Wave did rally above the highs of the upthrust at point U.

It is not mandatory that upthrusts be tested, but when they are, like now, we need to review the techniques regarding tests.

If a stock or index tests an up thrust or a spring, the test is said to be successful if it is completed on reduced spread and volume and the test does not exceed the high of the upthrust or the low of the spring.

If the test does exceed those highs and lows, but is unable to continue and moves back below the upthrust or above the spring, it is considered a a weak test.  Weak tests need to be repeated.

Friday’s market action appears to be a test of the up thrust.  You can see how the Wyckoff Wave penetrated the resistance line I have drawn in at the top of point U.  If that assumption is correct, and the Wave reacts, this was a weak test that will need to be repeated.  While the Wyckoff Wave may well continue to rally, Friday’s presence of supply, the nearly overbought condition of the Technometer and the downward trend of the Force Index suggests that a rally will be difficult to maintain. In my opinion, the odds favor a reaction.

In light of all this uncertainty, what is a Wyckoff trader to do?

One of the most important Wyckoff techniques is to always trade within the current trend.  Presently, the short term trend is up.  While this up trend has been slightly weakened, it is by no means broken and therefore must be honored.

The intermediate term trend is neutral.  However, a case can be made that point P was a Last Point of Support.  If that is the case, an intermediate up term trend can be established with the support line drawn through point H and P, with a parallel supply line drawn through point K.  The primary concern about this is that the reaction to point P was on good price spread and volume and the reaction fell through the creek and returned to the original trading range.  While there was reduced spread and volume at point P, this was a result of the shortened trading day that followed the Thanksgiving holiday.

That all being said, Wyckoff traders to the long side that have taken positions are enjoying profits and should continue to hold them.

However, short term traders to the down side are in a bit of a dilemma.  Short-term traders often do not wait for a trend to develop an be confirmed.  They are anticipating the trend.  This is why short term trading is riskier than intermediate and long-term investing.

It was perfectly reasonable for short-term traders to take short positions on the up thrusts at point U.  Unfortunately, the expected nice reaction didn’t occur.  This is where the short term trader must adhere to market discipline.  The worst-case scenario must always be considered and an exit strategy established.

In this case, the exit strategy must be at the high point of the upthrust.  If a position was taken and the stock or index rallied past the highs of the upthrust, the position must be liquidated.  No wishing.  No hoping.  No justifying.  Just liquidated.

Even though it is certainly possible the stock or index will react this week and the trader will see a profit, it is also possible the rally will continue and losses will increase.  This is the discipline of short-term trading.  Set an exit point based on Wyckoff principles and be disciplined enough to follow-through if the market turns against your trade. This is especially true for those trading options where the trader usually uses mental stop orders.

This is also why it is important to select stocks or indexes to trade that are weaker than the Wyckoff Wave.  The weaker stocks or indexes most probably will not have exceeded the up thrust highs and therefore, can continue to be held in anticipation of a reaction.

While the intermediate-term trader can easily work through a corrective reaction, the short-term trader does not have the time to ride out unexpected changes in market direction.

Remember, like in any business, it’s not how much you make, but how much you don’t lose.  Without capital there is no opportunity to make money.

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.