Friday saw some strong selling come into the US Stock market. This was not constructive for the market. Does it mean we are now about to go lower? Based on the current picture of supply and demand, I think the odds favor lower prices. Let’s take a good look at the daily bar chart of the S&P e-mini futures market (ES) since early September, and then apply the Weis Wave to the run up since early summer. Doing this will give us an idea of what we can anticipate next.
Daily Bar Chart
The daily bar chart (the one on the left) shows the trading range that developed after the high thus far for the year was put in on September 14. This is labeled A. You can see that the volume on this day was quite high. In fact, it was the highest volume since early August. The day did not see as much progress up as the day before, and the close was in the middle of the range. Selling entered the market. With the increase in volume, this day was showing clear signs that a reaction is near.
The reaction lasted just about two weeks and ran down to B. Note that we didn’t see much pickup in volume to the downside as price moved down to B (a point we will come back to shortly). From B, the market turned and rallied to C. Look carefully at the two bars preceding C. These are both up days with their price bars closing near the highs, but check the volume. It is low. Tom Williams would label these as no demand days, signifying that the market is moving up, but without the support of the professional side of the market. On the day labeled C, buyers try to push price higher, but they fail near the high of A. Sellers, seeing that buyers were weak, step in and sell the market down, forcing the bar to close in the lower quarter of its range.
This sparks another reaction to D. Price revisits the low of B. Again, Volume does not expand much to the downside. On the three bars preceding D, we see shortening of the thrust, though the closes were poor. At D, the market springs the low of B, indicating it will rally and make another attempt to paint new highs above A and C. But like the rally to C, demand is not forthcoming on this rally. The rally dies out at E, showing shortening of the thrust and also an increase in volume resulting in a poor close at E. Again, we can anticipate a reaction.
The reaction so far has had only one day (Friday). Friday’s price bar is the largest we see and has a sizable increase in volume. This is supply exerting itself.
Viewing longer-term structure (charts not shown), price is currently at support from the high put in last March-April. The key question is: Will the market break that support? The odds are good it will. Typically, when a market approaches support on wide spread and increased volume, it will break that support. We have all seen instances when that doesn’t happen; the market shakes out weak holders and then reverses. But shakeouts are usually on less volume than Friday, and we have already had a Spring, which is itself a kind of shakeout. Why do it again?
Weis Wave Analysis
Let’s look at the daily chart from the June 4th low with the Weis Wave indicator. A few things jump out. First, at A (this is the same A as in the bar chart), we are overbought in the trend channel. (You can see how straightforward trend lines and careful reading of the price bars and volume would tell you to at least exit any longs you might have had).
The reaction from A down to 1 did not produce any significantly larger down wave in price, but look at the wave volume. It’s the largest selling volume we see on the chart. Note that we were unable to see this off the bar chart, as mentioned above. Only David Weis’s Wave indicator allows us to see this so clearly.
The next wave up to 2 shows pretty strong volume – more volume than seen on many of the up waves in this uptrend (again, this was not seen on the bar chart). So why wasn’t this volume able to carry prices higher above A? There is only one reason: Selling was overcoming buying. In Wyckoff terms, there was an effort to rally, but the result was poor.
The reaction down to 3 shows good downside volume. The rally to 4 shows the clear lack of demand. Buyers had finally become exhausted.
What’s Next?
As mentioned above, we are sitting on top of decent support. (You will see this, too, if you consult a weekly chart). If price can push through this support, it will also break the demand line of the trend channel. This will signal that the uptrend – at least this leg of it – is over. So where might price go if it does break support?
Interestingly, I don’t see a huge amount of distribution having taken place. There is some supply, there is no doubt about that, but I don’t see the chart saying we are now headed for a new bear market. At least, not yet. Signs currently point to a modest correction.
The halfway point from the beginning of the rally is a level Wyckoff would look to for a normal correction. From the June 4 low, this is about the 1365 level. This is just under the high of 2011 (1373.50). A test of last year’s high would be a reasonable action for the market, should it break the recent trading range lows (B & D).
Weis Wave
I continue to feel fortunate to be able to use the Weis Wave in my trading. Based on Wyckoff’s original Wave Chart, you can see how valuable it can be. You can learn more about this highly valuable tool along with the multiple was to use it in your trading here: The Weis Wave Plug-in.
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