I have gotten several emails asking about last week’s market action and whether we have seen a Selling Climax.
Selling Climax
A Selling Climax was first described by Richard Wykoff in the first decades of the 20th Century. It occurs after a market has been trending down and suddenly, the market falls precipitously. It is a scary time and the sudden fall causes large numbers of investors and traders to unload their stock at the same time. Daily ranges are wide and volume increases dramatically. Wyckoff viewed this as an early sign that the down trend was over as stock was sold by what he called “weak hands” (the public) and bought by “strong hands” (the large, professional market operators).
The panicky selling causes a vacuum and a technical rally ensues. Should the market hold at or around the level of the Selling Climax on the next pullback (i.e., a successful test of the climax), then the downtrend can be considered over.
Did we see a Seeling Climax Last Week?
We certainly had wide ranging days and a precipitous decline. We also saw several days of very heavy volume come into the market. On Tuesday, August 9th, we also saw the market reverse after dipping under Monday’s lows. Weren’t these the signs of a Selling Climax?
Well, not really. If we were to see these conditions after a lengthy decline, I would be sitting up taking notice and thinking about a Selling Climax. But we haven’t been in a lengthy decline. In fact, we are just breaking from a long trading range as the daily SPY chart shows. Anyone who has taken any of my classes knows that the odds favor further downside action, perhaps a lot more downside action.
Applying a Specialized Tool
As we look carefully at the SPY chart we also see a very large increase in downside volume. This is highlighted nicely by the Weis Wave, and indicates momentum has shifted to the downside. You can also see that so far, the rally up has produced meager upside wave volume, again highlighted well by David’s Wave chart. Finally, the last day on this chart – Friday – shows narrowed price range and very small daily volume compared to recent days. Not only is there not much buying on the up wave, the buying now looks exhausted. This is not the kind of market behavior we would expect after a Selling Climax.
We may rally a little higher or go into a trading range for a period of time, but odds favor more downside to come.
For those interested in the Wyckoff Method and the Wave Chart developed by David Weis, we will be holding a webinar on Wednesday night on the Weis Wave and how to interpret and use it. Based on Wyckoff’s early tape reading charts, David has refined Wyckoff’s work for use in today’s highly active markets. David will be teaching you directly how to profit from this special tool. And, yes, the webinar will be recorded. You will also get the plug-in for TradeStation, so you will have the indicator to use for swing, position and intraday trading accross any markets you trade. This includes the FX markets, which now have a true volume tool showing serious insight into these currency markets.
The link below has several examples of what will be taught in detail on Wednesday night. Be sure to check it out:
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