Tag Archives: Technical Analysis of Stock Trends
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review, May 6, 2016
Studying Demand & Supply
Wyckoff teaches that both market direction and it’s turning points can be best understood by studying the demand and supply, that comes into the market, and how they relate to each other.
While the Wyckoff tools, like the Optimism – Pessimism Index, Technometer and Force Index, provide helpful indicators as to the market’s relative strength or weakness, they’re all based on the interrelationship between demand and supply.
This week the Wyckoff Wave continued its reaction off the April 28th high, at point V. Last week, this blog post explored the different scenarios that could take place as a result of this reaction.
Let’s look at this week’s market action and see if we can determine if any of these scenarios can be eliminated.
This past Monday, following Friday’s reaction, the Wyckoff Wave experienced and intra-day failure to the downside, on decreased price spread and volume. This suggested a lack of supply.
However, an examination of the intra-day waves indicated a lack of demand. This opened the Wyckoff Wave up to more supply coming into the market and continuing the reaction. That happened on Tuesday as the Wyckoff Wave reacted and moved closer to the resistance, now support line, drawn through points R and T. This line forms the top of the trading range, that began last August. Once things clarify, this line may be changed and drawn through point V. But we’re getting ahead of the story.
Because demand was being withdrawn and supply was coming into the market, the Wyckoff Wave had an opportunity to continue its reaction and move through that support line.
Instead, on Wednesday and Thursday, the Wyckoff Wave reacted on reduced price spread and volume. This suggested supply was drying up. The drying up of supply offers an opportunity for demand to come into the market. This meant that the Wyckoff Wave could begin a new rally.
On Friday, the Wyckoff Wave rallied on increased price spread, but decreased volume. Because the gap opening to the downside was the low for the trading day, Friday’s market action was not an intra-day failure to the downside.
A widening of the price spread on decreased volume indicates a lack of supply. This was confirmed by an analysis of the intra-day waves.
Instead of demand coming into the market, at a very logical point, the Wyckoff Wave rallied on a lack of supply.
This week’s market action suggests that the sellers are not particularly interested in liquidating stock there aren’t too many buyers waiting to get into the market.
In addition, the Wyckoff tools are not providing any significant indications as to the market’s future direction.
How does all this relate to last week scenarios and what can we expect in the near future?
One of the scenarios was that strong supply would come into the market and drive the Wyckoff Wave back into the trading range. This week’s lack of supply has dramatically reduced that scenario’s probability of success.
A second scenario had the Wyckoff Wave backing up to the top of the trading range, on reduced price spread and volume. If the reaction ended in the area between the top of the trading range and the support at point U, and good demand came into the market, the Wyckoff Wave could put in a nice rally.
So far, that hasn’t happened. Demand is simply not present and has not come into the market when the opportunity presented itself. While the Wyckoff Wave could certainly rally next week, the lack of a strong response to this drying up of supply, reduces the scenario’s probability of success.
In addition, while the O – P Index is in harmony with the Wyckoff Wave, a rally could create a short-term negative divergence, when compared to point V. Finally, the Technometer could easily move into an overbought position on any kind of a rally.
The Wyckoff Wave could rally on relatively narrow price spread and volume and successfully test the high at point V. A successful test could be the beginning of a new phase in the trading range. Initially the resistance would be at point V and support at points S or U.
The final scenario would be a successful test at point V. However, in this scenario the Wyckoff Wave would encounter supply and react strongly back into the trading range. It could even test the lows at point M.
This scenario has a fairly low probability of success. When supply comes into the market to initiate a substantial reaction it does so quickly and strongly. The reaction off point V does not have any of these characteristics.
Therefore, it appears that the Wyckoff Wave will begin a new phase of the trading range, with the support at points S or U and resistance at point V.
This new phase would also allow for ending action at a higher level. The Wyckoff Wave would not have to react back to point M and put in ending action in the form of a Spring. It would only have to spring the support of the new phase of the trading range.
I continue to believe that this trading range is accumulation. We have seen little supply and, more importantly a relatively dull market. Distribution is shown on the charts with a wider price spread and higher volume, as sellers attempt to liquidate large positions.
When the market is accumulating there is a tendency, in general, to see narrower price spread and lower volume. If you are bullish, like I am, boring is good.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review, May 27, 2016
Revisiting The Technometer & A Thought For Long Term Investors
Last week there was a small conflict between the Wyckoff Wave’s Technometer readings and the analysis of its price spread and volume. Even though the Technometer was in a clearly overbought condition, Wyckoff analysis suggested the Wyckoff Wave was not ready to react.
My Wyckoff studies tell me that when there is a conflict, stick with market analysis that studies the relationship of both supply and demand. This past week, the Wyckoff Wave rallied.
Even so, the rally was of poor quality. Although the Wyckoff Wave weakened its short-term down trend channel (drawn in red on the daily chart) it encountered resistance as it approached an earlier high at point X.
In addition, the Technometer readings became more overbought. In fact, they were more overbought than they were when the Wyckoff Wave was at points V and X.
An analysis of supply and demand suggested that little demand was present and the Wyckoff Wave was vulnerable to a reaction.
One helpful way to analyze the Technometer is in its relationship with the Wyckoff Wave. Wyckoff teaches that if the top of a market reaction is accompanied by an overbought reading that is more overbought than the last reading, but the Wyckoff Wave is unable to reach those earlier highs, it is a fairly negative indication. This is what is developing.
At point V, the Technometer reading was 53.64. At point X, it was 53.44. These are both in clearly overbought conditions. On Friday, the Wyckoff Wave posted a Technometer reading of 54.36. It is now in a more overbought condition than it was at points D or X.
By itself, that is not a significant difference. However, look at the Wyckoff Wave and its relationship with points V and X. While it is only slightly lower than point X, it is significantly lower than point V. Yet the Technometer reading is higher.
This suggested two things. The first is that it will be extremely difficult for the Wyckoff Wave to advance. It will probably have a difficult time rallying past point X. The second is that next week should bring a reaction that will return the Wyckoff Wave to its short-term down trend channel.
What kind of a reaction can we expect? So far, even though demand is being withdrawn, strong supply has not come into the market. In addition, the intra-day chart is giving us some preliminary indications about a change in direction.
On Thursday, May 19th the intra-day trend was changed to up. The Wyckoff Wave rallied and stayed within the trend for six trading days. It began to show relative weakness at point J.
There it was unable to reach the channel’s supply line at point J. Then, the Wyckoff Wave reacted to point K and moved into a slightly oversold position, relative to the trend.
Notice the market action after point K. If the trend was going to continue, the Wyckoff Wave needed to rally strongly and return to its intra-day up trend channel. That didn’t happen. Instead the Wyckoff Wave rallied very slightly, on reduced price spread and volume. While some of the lethargy could be attributed to the holiday weekend, the Wyckoff Wave’s inability to even make an attempt to return to the trend channel is not positive. On Friday, the intra-day trend was changed from up to neutral.
Often intra-day trends provide clues to future action. This appears be the case here and suggests the Wyckoff Wave is poised to react.
The real question is, how deep will the reaction be? Another clue may come from the Force Index readings. The Force Index is a measure of investor sentiment. It usually produces negative readings. The Force Index is best used when comparing it to the Technometer. If the Technometer moves into an overbought condition, but the Force Index is producing low negative, or positive readings, the expected reaction will not be particularly deep.
On Friday, the Force Index reading was +103.95. This is a strong positive readings and should have a mitigating impact on any expected reaction.
While the Wyckoff Wave is expected to return to its short-term down trend channel, the scenario where it holds above the lows at points U and S continues to have the highest probability of success.
The Wyckoff Wave has been in a trading range since the Selling Climax back in August 2015. The price spread and volume continue to suggest the trading range is accumulation and the Wyckoff Wave has more potential to the upside.
Long-term investors should be ready to take new positions on any ending action to the upside. That would be a Spring, it’s Secondary Test or a Last Point of Support.
The Wyckoff Wave is near the top of its trading range. This is probably a good time to review portfolios and weed out poorly performing stocks or those who have reached objectives. This can provide cash that can be used during ending action.
Some minor tweaking an adjustment made lead to some more significant profits.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 8, 2016
Accumulation – Boring Is Good
This past week the Wyckoff Wave lost a miniscule 204 points. That was a reaction of one half of 1%. Since breaking the short-term uptrend channel at point R, the Wyckoff Wave has moved sideways for almost 3 weeks, in a very narrow trading range.
The Wave is at the top of the trading range that began last August. Since then it has established both support and resistance lines and continues its slow sideways move.
For several reasons, this trading range appears to be accumulation, not distribution. Today’s blog post includes a more detailed look at why the trading range appears to be accumulation and what we can expect when it ends.
Accumulation is a trading range where an attempt is made to encourage weak hands to sell and strong hands to buy. This is done using two important strategies.
The first is relatively sharp declines that scare many investors and caused them to liquidate their assets. The first was last August’s Selling Climax, marked on the daily chart as point Q.
After the Selling Climax, the Wyckoff Wave established important resistance and support levels. Whey are both drawn on the daily chart.
The second sharp decline began at point D. The Wyckoff Wave had rallied to the top of the trading range and had moved sideways for several weeks. Suddenly, it reacted sharply towards the bottom of the trading range. The reaction ended with a minor Selling Climax at point G. The reaction was accompanied by bad news, which also encouraged weak hands to sell their stock.
After a sideways move, in a bit of the mini trading range, the Wyckoff Wave gradually rallied back towards the top of the range. The rally was not particularly strong. Also, while the reaction from point D took a little over three weeks, the rally back to point R took about six weeks. This suggested that as the professionals were not in a great hurry to mark up stocks and the trading range would probably continue.
The second accumulation strategy is the creation of a dull market. Investors and traders like market action. They like to look at their portfolios and see a nice daily gain. When that doesn’t happen, they often look elsewhere for opportunities that will give them a better return on their investment.
That is exactly what happened at both points X and R. The Wyckoff Wave rallied, established, or in the case of point R successfully tested, the top of the trading range and began a long slow sideways movement.
Like the move from points X to D, that preceded the sharp reaction, the same can be expected as this present sideways move develops. The investor or trader becomes bored with the lack of market action. Suddenly there is bad news in the market reacts. This is exactly what the professionals want and the combination of dullness and a sharp reaction leads to more liquidation.
The accumulation process will continue until much of the available supply is taken in by the stronger hands.
Then, suddenly there will be ending action, most likely in the form of a Spring. Instead of successfully testing support at the bottom of the trading range, the Wyckoff Wave will move through that support on good price spread and volume. This gives the impression that the markets are going to crash. It also motivates many of the remaining weak holders to liquidate their stock.
Suddenly, strong demand comes into the market and the Wyckoff Wave springs back into the trading range. Little supply is left and this causes prices to rise and the market to rally. The professional traders have accomplished their goal and are now ready to move the market strongly to the upside.
This effort is helped by the weaker holders, that originally sold their stock, and are now trying to get back in to the market.
For these reasons, I strongly believe that this trading range is accumulation. This would mean the Wyckoff Wave is going to react back towards the bottom of the trading range, at least one more time, before a significant move to the upside.
The reaction could begin this coming week or the Wyckoff Wave could move sideways. So far, when the Wyckoff Wave is made an attempt to react, there has been no follow-through. This allows the Wave to rally, like it did on Friday.
However, there is little demand on these minor rallies. This market action suggests the boring sideways movement is accomplishing its objectives. These are excellent conditions for the appearance of supply. Supply that is needed for the expected short-term reaction, back towards the bottom of the trading range.
While the stock market is going through relative dullness, there may be some bright light at the end of the tunnel.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 15, 2016
Mixed Signals At The Top Of The Trading Range
This past week, the Wyckoff Wave gave us a bit of a surprise. Instead of successfully testing the recent highs at points T and R, it rallied through them and is at the very top of the trading range.
The Wyckoff Wave rallied past points D and B to point Z. Point Z was the highest resistance level in the developing trading range. The resistance line on the chart has been adjusted.
What does all this mean and what can the short term and long-term traders and investors expect?
The Wyckoff Wave has rallied from the bottom to the top of the trading range. During that rally there has been little supply and it certainly did not come into the market during the past couple of weeks. This past Thursday, the Wyckoff Wave attempted to move into new high ground and failed.
Could Thursday’s market action have been an upthrust? This would dramatically change the long standing accumulation scenario. Is it possible that what once was thought to be accumulation, could actually be distribution.
However, a look at Thursday’s market action, in more detail, suggests that wasn’t the case.
An upthrust is defined as having three characteristics.
- The shortening of price spread as the resistance is penetrated.
- An increase in volume.
- A poor close.
An upthrust is an attempt to rally into new high ground. The rally encounters strong supply and, after a brief supply and demand battle, there is a sharp reaction. The close is at or near the bottom of the day’s price spread. Every upthrust consists of strong supply coming into the stock or index.
On Thursday, the price spread was reduced and the volume was higher. However, the Wyckoff Wave closed in the middle of a narrower price spread. This suggested the strong supply, that would justify the upthrust scenario, did not come into the market.
That observation is confirmed on the attached intra-day chart. Thursday’s market action is between the two vertical lines, drawn in red.
From an intra-day perspective, Thursday was a rather boring day. While there was good supply on the first intra-day wave, the Wyckoff Wave rallied to point G on a lack of demand. This was where supply should have made an appearance.
Instead, the supply was rather light and certainly not sustained. This is not indicative of an upthrust. In fact, on Friday after a morning intra-day rally to point R, which was helped considerably by a gap opening, the Wyckoff Wave reacted on a lack of supply.
This strongly suggests that Thursday’s market action was not an upthrust.
The Wyckoff Wave also had an opportunity to rally through the top of the trading range into new high ground. So far, that hasn’t happened either.
If the Wave is going to continue to the upside, there is normally an earlier indications that demand was present. This past Tuesday, the Wyckoff Wave did rally on wider price spread and increased volume. Then demand withdrawn and the Wave stalled at the top of the range.
All this suggests the Wyckoff Wave will probably react, test the lows at points U and S and then rally to test this past week’s highs. Then we could see that long awaited reaction back towards the bottom of the range.
This blog post has been primarily geared to short-term traders. Long term investors, should continue holding positions to the upside. If, I am wrong, and the Wyckoff Wave continues to rally through the top of the trading range, they can grin a lot and enjoy profits.
Full disclosure, I’ll be grinning right along with them. In addition, if the Wyckoff Wave reacts, there is an opportunity to add to intermediate and long-term positions at the bottom of the reaction.
It looks like boring will probably continue. That’s not always a bad thing.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 22, 2016
How Long Can This Poor Quality Rally Last?
This past week the Wyckoff Wave continued its poor quality advance, which began, in early April, at point U, on the daily chart. The rally has been on relatively low price spread and moderate volume. A daily review of the Wyckoff Wave and its intra-day waves indicates a significant lack of demand.
Wyckoff teaches that a lack of demand opens the door to supply. Supply comes into the market and the reaction begins. So far, that isn’t happening. To find out why, let’s go back to basic Wyckoff and the concept that accumulation is the process by which strong, or professional, hands obtain stock from the public. Once enough stock has been accumulated and there is little supply, a stock or index can easily advance.
The question is why isn’t the public selling their stock? An answer to this question may be found on the Wyckoff Wave’s weekly chart.
In November, 2014 the Wyckoff Wave had rallied to point B on the weekly chart. It was in a slightly overbought position, relative to the long-term up trend channel. This channel had been in place since the 2008-2009 bear market. At point B, the bull market had lasted for a little over five years. Enthusiasm was strong, as many felt the rally could go one for a long, long time.
That didn’t happen. As you can see on the weekly chart, the Wyckoff Wave moved sideways and put in a slightly higher high at point F. The rally to point H did not put in a new high and the Wyckoff Wave reacted to point L.
The reaction ended at point L, which was a Selling Climax. This was a normal corrective reaction. It held above the halfway point of the rally from an earlier period of accumulation. Pn October 2011 (this point H does not appear on the weekly chart) to the high at point F. This is a rather reasonable reaction after such a long and wonderful bull market.
Throughout the bull market the public had continued to purchase stocks. While some supply did come in during the sideways movement, beginning at point B, the relative shallowness of the normal corrective reaction to point L suggests the professionals continued to hold shares.
Notice the support line drawn through the sideways movement that began at the first support area at point C. The line was drawn through points C and G. Then, it continued to the right side of the chart. This is an important support/resistance line that could come into play in the near future.
After the selling climax at point L, on the weekly chart, the Wyckoff Wave moved sideways. It established a resistance level at point O and support at point P.
The public, who had purchase stocks in the bull market and especially during the sideways movement, that began at point B, got very nervous on the reaction to point L.
I received a few e-mails suggesting that the bull market was over and everyone should get out of the market.
Was the bull market really over? If so, what other investment options are available? The public’s answers to those questions could provide the key to the poor quality rally.
Usually at this time, the public, seeing a nice rally, uses it as an opportunity to get out even or with a small loss. However, because of the artificially low interest rates, there simply aren’t very many other options. Therefore, the public hopes the market will continue to rally and they can get back their initial investment.
That logic suggests there is a fair amount of overhanging supply in the sideways movement that began last November, at point B. The Wyckoff Wave is approaching that old support, now resistance line marking the bottom of the sideways movement. This is probably where supply will begin to come into the market and stopped the advance.
In normal economic times, the supply would’ve come in sooner. However, because the Federal Reserve has established artificial controls to market activities, the lack of alternative investment options keeps more of the public in the stock market.
The overhanging supply is most certainly present. It may need a bit of the catalyst, like some bad news, too begin the reaction.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review April 29, 2016
Some Supply Offers New Scenarios
On Thursday, the Wyckoff Wave finally ran into some supply. The supply came in as the Wyckoff Wave reached some important support areas at the bottom of the trading range, that began in November, 2014.
This is best shown on the weekly chart. Notice, that this week, the Wyckoff Wave rallied and tested the old support/resistance line that began at point C. Then it moved to point G and continued to the right side of the weekly chart.
This past week’s market action is the last line on the weekly vertical line chart. As you can see, the Wyckoff Wave reached that support/resistance line. There it encountered supply and is reacted.
That scenario was discussed last week. This weeks blog post discusses the type of supply that is coming into the market and some new scenarios. These are best reviewed on the daily chart.
As the Wyckoff Wave approached the bottom of the old trading range, Is Technometer moved into an overbought condition. This is shown on the daily chart.
At the same time, the Force Index began to display positive readings. When a Force Index produces positive readings and the Technometer is in an overbought condition, there is a mitigating impact on the Technometer’s effect.
This meant that, while it will be difficult for the Wyckoff Wave to continue its advance, any reaction may not be as deep or long as it would be, if the Force Index was producing moderate negative readings. It is also an indication of the type of supply that would is to come into the market.
On Thursday the Wyckoff Wave experienced and intra-day failure to the upside. It closed lower, on wider price spread and increased volume. This suggested the presence of supply.
On Friday, the Wyckoff Wave continued to react. It did so on both increased price spread and volume. This also suggested the presence of supply.
While supply certainly was present, an analysis of the intra-day waves indicated that only a moderate level of supply came into the market. This was consistent with the relationship between the Technometer and Force Index. It also suggested that the Wyckoff Wave could see support between Friday’s close and the top of the trading range. That top is marked by green line drawn through points V, X, Z, and B, D, R and T.
This situation creates some new scenarios that must be kept in the back of every Wyckoff trader’s mind.
First of all, is the Wyckoff Wave going to react back towards the top of the trading range and put in a Last Point of Support? If so, that would suggest the rally from point M to point R was a Sign of Strength within a trading range and the move to point you was a Last Point of Support.
Following that logic, the rally from point U to Thursday’s high, would be a second Sign of Strength or a jump across the creek.
While that was certainly possible, the nature of both rallies suggested poor quality demand. That makes it difficult to justify Signs of Strength.
Another scenario is that strong supply will come into the market. The Wyckoff Wave will react back into the trading range and even test the lows marked by the August, 2015 Selling Climax at point G. This would require sustained supply and fairly wide price spreads to the downside coupled with strong volume. So far the Wyckoff Wave has not indicated that a strong reaction is on the horizon. As strong supply may come into the market over the next couple of weeks, that scenario cannot be ignored.
The final scenario is a continued sideways movement, which would form a new phase of the trading range. This would have the Wyckoff Wave continue to react on moderate supply and test either the top of the trading range, or the lows at points U and S.
If that happens, the Wyckoff Wave could continue its sideways movement, but the ending action would not have to be at the absolute bottom of the trading range.
This scenario appears to have the highest probability of success.
A great way to watch which scenario is developing is to pay attention to the Optimism – Pessimism Index and its relationship with the Wyckoff Wave.
The O-P Index is simply a measure of volume. The volume from each intra-day up wave is added to the index. The volume from each intra-day down wave is subtracted. This represents the amount of effort that is going into moving a stock or an index in a particular direction.
The Wyckoff Wave is a measure of price. Its relationship with the Wyckoff Wave is how much or how little effort it took to move the Wyckoff Wave to its present price level.
If the Wyckoff Wave continues to react, it will be important to study its relationship to the O – P Index, by comparing it to point U.
Notice that the Wyckoff Wave is noticeably higher than it was at point U. The O-P Index is only slightly higher. If the Wyckoff Wave reacts and its O-P Index reading moves below point U, while the Wyckoff Wave remains higher than it was at point U, this would be a positive divergence. It would suggest supply is being taken in. It would reduce the probability of a strong reaction back into the trading range. It would also increase the probability of the new phase of the trading range scenario.
If the top of the rally was Thursday’s high, it will be important to watch the Wyckoff Wave ‘sreaction, in relation to point U. If the Wyckoff Wave can hold above the halfway point of the rally from point U to Thursday’s high, this would add credence to the Last Point of Support scenario. If it continues to react past the halfway point, this would increase the probability of the new phase of the trading range scenario.
A couple of things to watch as this interesting market continues to develop.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 4, 2016
A Weak Rally That Doesn’t Want To End
Forty years ago, I was traveling in upstate New York on business. I was also doing some fairly significant short-term trading. I spent the night in Lake Placid and carefully reviewed my short-term positions and concluded that none were in jeopardy.
The market was quite similar to what we have seen in the last month. It was in an important trading range and had successfully tested the support at the bottom of the range. Like now, it began to rally off that support.
Also, like now, the rally was not on strong demand, but when supply came into the market it was not sustained.
I concluded that since the Wyckoff Wave was rallying off the bottom of the trading range, it would automatically go to the top of the range and ensure some excellent short-term profits.
The next morning, I left Lake Placid and drove to a town near the Canadian border. Upon arrival, I checked the market. It was in the middle of a very strong short-term reaction and every one of my stop orders have been executed. In 2 1/2 hours I lost $6,427.32. That number is indelibly etched in my mind and served as one of the great lessons I learned at the University of Wall Street.
Just because the market is moving in an expected direction, after completing a Wyckoff principle, doesn’t mean it will do what you expect. One should always look closely at what price spread and volume is telling us and, if those answers seem to conflict with our initial view, it is best to retreat to the sidelines.
It is also extremely important to consider the risk/reward ratio before taking a position.
Last Friday, the Wyckoff Wave completed a two-day rally off point O. The first day of the rally was on reduced price spread and volume, which suggested a lack of demand. The second day, last Friday, was on reduced price spread, but increased volume. This suggested the presence of supply. These are not positive indications.
In addition the Wyckoff Wave had successfully tested the high at point N and encountered supply as it did so. All this suggested that the Wyckoff Wave would react and test the lows at point O and, quite possibly, point M. This was not a good place to take a position to the upside.
On Monday, the Wyckoff Wave experienced an intra-day failure to the upside. It closed, on decreased volume, at the bottom of a wider price spread. This suggested a lack of supply.
However, a closer review of the intra-day waves, indicated the presence of supply. This suggested the reaction would continue.
This conclusion was supported by the overall poor quality market action, since the Wyckoff Wave moved through the top of the mini trading range, marked by the line drawn from point L.
This is about where the market was on that fateful Lake Placid day. But, instead of collapsing, the 2016 Wyckoff Wave continued to rally. This past week has produced a narrowing of price spread and slightly lower volume.
Because the Wyckoff Wave moved above point N, the short-term trend was changed from neutral to up. So far, the Wyckoff Wave is sitting in the middle of this trend channel and has not yet made much of an effort to test the channel’s supply line. In addition, it is encountering resistance as it approaches the old support levels at points E, C, A, Y and W.
In addition, on Monday the Technometer will open in an overbought position. Ae are also seeing some negative divergences when the Optimism – Pessimism Index is compared to the Wyckoff Wave. There also in negative divergences when the Force Index is compared to the Wyckoff Wave.
The overall quality of the rally off point M has not been good. In my opinion, there has been no good place to take short-term positions to the upside. I expect the Wyckoff Wave will react. If that happens, it will greatly reduce or eliminate any short-term profits on trades to the upside.
Like my Lake Placid story, those reactions can be fast and hard. I would rather miss a short-term opportunity to the upside, then take one when the market is sending conflicting signals.
If I am wrong, and the market continues to rally towards the top of the trading range, there will probably be some excellent opportunities to the downside.
If the market reacts, short-term opportunities to the upside can be revisited.
My Lake Placid lesson is simple. It’s not how much you make, it’s how much you don’t lose.
This week, we are introducing a new Wyckoff E-book, written by me, called Wyckoff Strategies & Techniques, Finding and Trading Winning Stocks. The book is a detailed explanation of Wyckoff principles, updated to reflect the stock market in the 21st century. The book is over 150 pages in length and contains over 50 vertical line and point and figure charts.
In addition, as an extra bonus, a free audio version, with its own charts, is included with every e-book.
We are very excited about this new publication. Learn more about my new updated Wyckoff course
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 11, 2016
Taking Positions In A Trading Range
Stock Market Institute icon, Robert Evans, was not a big fan of taking short-term positions in a trading range. Mr. Evans was an intermediate to long-term investor and didn’t pay great deal of attention to short-term moves. It is my understanding that he rarely took positions if the estimated gain was not at least 15 points.
Others at Stock Market Institute were more interested in short-term positions. Using their Wyckoff strategies and techniques they had excellent success with short-term or swing trades.
While short term trading can be a little tricky, as Wyckoff indicators like Springs, Upthrusts and Last Points of Support or Supply are not available, Wyckoff concepts and the Wyckoff Tool Kit can be extremely helpful in identifying changes of direction within a trading range.
It is quite possible that this past week’s market action is telling us that we are at one of those trading range turning points.
First, let’s briefly review the bidding. On August 24, 2015, the Wyckoff Wave experienced a Selling Climax at point Q. There was an automatic rally to point R and a Secondary Test at point S.
Then, the Wyckoff Wave began to move sideways and put in its first resistance point at point X. The Wave continued to point D and then reacted to point G. In addition to being another successful test of the Selling Climax, point G confirmed an important support area in the developing trading range.
By the middle of February, the Wyckoff Wave had moved sideways to point M and began to rally off the bottom of the trading range. This rally reached its apparent top at point P, where it appears demand is being withdrawn.
After the Wyckoff Wave rallied past the high at point N, the short-term trend changed from neutral to up. The support line was drawn from point M through point O. The parallel supply line was drawn from point N. So far, the Wyckoff Wave has been unable to reach that supply line..
This past Monday, the Wyckoff Wave reached point P. It did so on reduced price spread and volume. This suggested a lack of demand. This lack of demand was an indication that the rally was in jeopardy.
In addition, the Technometer was in a very overbought condition. A further review showed a short-term negative inharmonious action, when the Wyckoff Wave is compared to the Optimism – Pessimism Index. At point P, the Wyckoff Wave is noticeably higher than it was at point N. However, the O-P index was almost at the same level. That suggested there was not much effort attempting to move the Wyckoff Wave higher. This is indicative of a lack of demand.
Finally, when compared with the same two points, the Wyckoff Wave was in a negative divergence with the Force Index. Even though the Wyckoff Wave was higher, investor sentiment, which is measured by the Force Index, was lower than it was at point N.
All this suggested the rally was ending and a reaction back to check the support levels was in the offing. This meant short-term positions, to the downside, could be considered.
On Tuesday, the day following point P, supply did come into the market and the Wyckoff Wave began to react. It was not a strong reaction, but a beginning. Wednesday brought a slight rally on reduced price spread and volume. This suggested a lack of demand and did nothing to indicate the reaction would not continue.
Thursday was a disappointment for the bears. After a brief rally, the Wyckoff Wave experienced an intra-day failure to the upside. Good supply came into the market. The Wyckoff Wave reacted sharply and penetrated the short-term uptrend channel’s support line. There it encountered demand and the Wyckoff Wave rallied back into the trend channel. Was this a resumption of the up move or a test of point P?
Part of that answer arrived on Friday. After a wide gap opening to the upside, which encompassed most of the day’s gain, the Wyckoff Wave made little progress and began to encounter some overhanging supply.
The Technometer had returned to a clearly overbought condition and the Wyckoff Wave’s longer-term negative divergence with the O – P Index, when compared with the top of the trading range, continued.
These negative indicators suggest it will be difficult for the Wyckoff Wave to continue its advance. This gives the reaction scenario a good chance of success. If the test of point P is successful, new and additional short-term positions can be considered to the downside.
If this observation is correct, how far will the Wyckoff Wave react? There is no ending action or Last Point of Supply. So far there is only a count of 1,100 points on the 100 Point & Figure chart. However, not only is that incomplete, but as there are no Wyckoff indicators, on which to base account, it is a rough estimate, at best. The Wyckoff Wave could easily react all the way to the bottom of the trading range.
If the market reacts, as expected, short-term traders should watch the Wyckoff tools closely. Oversold Technometer readings and positive short-term divergence’s with the O – P Index are indications that the reaction could be slowing and positions could have reached their objectives.
While it is always helpful to trade in concert with the market, these indications are best found on your analysis of the stock that is being traded.
Finally, short-term scenarios can be tricky. Stop orders should be placed and closely watched. If strong demand comes into the market, position should be closed.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review March 18, 2016
Taking Positions In A Trading Range – Continued
This past week, despite all the delightful logic as to why the Wyckoff Wave would react, the rally off the bottom of the trading range (point M), continued. The Wave is now in a position to test the top of the trading range and the highs at points D, B, Z and X.
A week ago Friday, it appeared the Wyckoff Wave was putting in a successful test of an earlier high at point P. In response, the Wyckoff Wave reacted slightly on Monday and Tuesday. While the reaction was on relatively narrow price spread and lower volume, it did weaken its short-term uptrend channel.
The overbought Technometer and negative divergences with the Optimism – Pessimism Index added credence to the reaction scenario. It was not unreasonable to consider new short-term positions to the downside.
On Wednesday the Wyckoff Wave reacted, but experienced an intra-day failure to the downside. Some demand did come into the market, but a review of the intra-day waves suggested it was not particularly strong or sustained. In addition, the Wyckoff Wave was unable to return to its up trend channel.
Thursday saw a move decisive move to the upside. The Wyckoff Wave rallied on good price spread and volume and moved slightly above the high at point P. A review of the intra-day chart showed supply coming in to the market late in the trading day. Was the Wyckoff Wave putting in an intra-day Upthrust?
Short-term bears who had taken a position in the area of point P were either breaking even or experiencing a minor loss. One of the criteria for taking a position to the downside is identifying stocks weaker than the Wyckoff Wav. There was a good chance that those stocks did not rally as strongly on Thursday as the Wyckoff Wave.
Regardless, Friday was a critical day. If the Wyckoff Wave had upthrusted the intra-day trading range, good supply would’ve come in early Friday morning. The Wyckoff Wave would have reacted and begun a intra-day Sign of Weakness. If supply did not immediately come into the market, positions should be closed.
Creating scenarios and acting on them is extremely critical in a short-term trading environment.
On Friday, the Wyckoff Wave continued to rally, but did so on reduced price spread and increased volume. This suggested the presence of supply. Despite that, one could argue that the Wyckoff Wave will react and use that argument to justify maintaining their short positions.
Maybe the Wyckoff Wave will react. Maybe it won’t. We’ve just entered wishing and hoping territory.
The good Wyckoff trader, not seeing immediate early supply on Friday morning, followed his, or her Wyckoff discipline and closed out their trades. Perhaps the market will react early next week. Perhaps it won’t. Close the position! Break even or take a small loss and live to fight another day. If the short term trader does not use good Wyckoff discipline, they will lose money or, because their capital is tied up wishing and hoping, they will miss new opportunities.
When the market does not perform as expected, it is better to retreat to the sidelines and let the market give you more indications as to its future direction.
Short-term traders focus on relatively narrow moves that happen within hours, days or a couple of weeks.
Intermediate and long-term traders are not as concerned about short rallies or reactions. However, trading ranges give them an opportunity to make adjustments in their portfolios.
If the Wyckoff Wave reaches the top of the trading range, it will put in a 12 1/2% gain since the low at point M. This is a good opportunity for intermediate and long-term traders to review their portfolios and liquidate some positions.
Some stocks have been stronger then the market and have reached their objectives. Others have underperformed. Therefore, both can be sold at the top of the trading range, before any expected reaction.
These adjustments can be made to create cash that can be reinvested when the market reacts back towards the bottom of the trading range. This reaction would be expected, as the Wyckoff Wave has not gone through ending action, in the form of a spring. The move from point M has been relatively weak and it would be difficult to call it a Sign of Strength.
Trading ranges are great places to adjust portfolios and free up cash for new opportunities.
What will the Wyckoff Wave do next week? As one who was expecting and touting a reaction, I need to retreat to the sidelines and review the bidding.
On Friday the Wyckoff Wave closed right at the support line of its short-term uptrend channel. It is almost at the top of the trading range. If it is going to move strongly to the upside, strong demand needs to come into the market on Monday and the Wyckoff Wave should rally strongly through the top of the trading range.
The overall poor quality of the rally off point M. The negative divergences with the O-P Index and the inability of the Wyckoff Wave to return to its up trend channel on Friday all suggest the Wyckoff Wave will encounter resistance at the top of the trading range.
While I still favor the reaction within the trading range scenario, I would need to see more concrete evidence before considering new positions to the downside.
Technical Analysis of Stock Trends, The Wyckoff Wave – Week in Review February 5, 2016
Testing The Bottom
Are We Seeing A Mini Trading Range?
This past week, the Wyckoff Wave reacted and, for the second time, tested its January low at point G. On Wednesday, it rallied off that low at point K, move through resistance at points J and H. Ahe Wave returned to its intermediate downtrend channel. The channel is drawn in red.
In the process it broke the short-term down trend channel, drawn from points D and E. This change the short-term trend to neutral.
On the surface, the successful test and the rally through the earlier resistance, could suggest the Wyckoff Wave was prepared to move quickly back to the top of the trading range. However, at Thursday’s close, the Wave’s Technometer was in an overbought condition. The Wyckoff Wave had also moved into some negative divergences, when compared to its Optimism – Pessimism Index. The O – P Index was producing a great deal of effort, and had moved higher than the trading range highs at points B, Z and X. The Wyckoff Wave was still near the bottom of the trading range.
Finally, the sideways move from point G had been on relatively higher volume. This suggested some supply was still present.
It seemed difficult that the Wyckoff Wave would be able to rally in the face of these negative conditions.
On Friday, the Wyckoff Wave reacted on narrower price spread and reduced volume. This suggested a lack of supply. It also presented another interesting scenario.
Back in January, the Wyckoff Wave had ended the reaction off point D at point G. At point G there was wider price spread and noticeably higher volume. This could have been climactic in nature.
If we make that assumption, the rally to point H was an automatic rally and the reaction to point I was a secondary test. The Wyckoff Wave rallied to point J, which was a successful test of the resistance at point H. It then reacted to point K which was a successful test of the support at points G and I.
So far, it appears the Wyckoff Wave is simply testing the bottom of the trading range, as it has held above the more significant support at point Q. Remember that point Q was a Selling Climax that stopped the reaction from the March, 2015 highs. It is the beginning of a significant trading range that has not yet experienced ending action.
That’s the bigger picture. Are we seeing a mini trading range that began at point G? Let’s go back to our interesting scenario.
Ending action that precedes a rally, does not need to end with a Spring. It can also end with a Sign of Strength and a successful Last Point of Support.
Look at the market action to the right of point G and assume that point G is a mini Selling Climax. This gives us a support line drawn from point G and a resistance line drawn from point H.
This would suggest that on Wednesday and Thursday, the Wyckoff Wave rallied through the resistance at the top of the mini trading range and “Jumped the Creek”. Friday’s reaction could have been the beginning of a reaction to a Last Point of Support.
If that scenario plays out, and the Wyckoff Wave successfully “backs up to the Creek”, a count on the 100 Point & Figure chart can be taken in the vicinity of the 36,000 line. This would provide an estimated upside objective of between 39,800 and 41,000. The high at point Z is 40,300.
While this mini trading range is a short-term indicator, it does provide justification for a move back to the top of the trading range.
It is important to understand that there has been no Last Point of Support, that would confirm this scenario. It is also quite possible, the Wyckoff Wave will react back into the trading range and, once again test the lows at point G.
That, in itself, could provide the impetus for a move back to the top of the range.
This mini trading range does indicate that it will be difficult for the Wyckoff Wave to react through the support at point Q and into new low ground. This is because supply, in the form of an Upthrust, did not appear on either Thursday and Friday. On Friday, instead of coming into the market, supply began drying up.
This mini trading range could serve as a timing indicator to take short-term positions to the upside. It’s also fun to watch as there is a Wyckoff concept in play.
Short-term traders will get their answer next week, as there could be a couple of entry points for trades to the upside. The entry points will either be a successful Last Point of Support for a successful test of the bottom of the trading range.
One important point, be careful of taking new positions to the upside, if the Technometer remains overbought or in a high neutral condition. This would indicate supply is still in the market and could have a mitigating impact on the strength of any rally. While the strong Force Index, may mitigate that situation, it is difficult for a good rally to develop in the face of an overbought Technometer.
It will also be extremely important to watch the relative price spread and volume, if the Wyckoff Wave continues to react. Narrow price spread and noticeably reduced volume would indicate supply is drying up and improve chances for a good rally. If this happens, they will also be a reduction in the Technometer reading.
Trading ranges can be a bit boring for traders who enjoy market action. It’s nice to see a little Wyckoff indicator every now and then.