The market was sloppy yesterday morning, and then traded lower in the latter part of the morning through the noon hour. The night before in the overnight session, the market fell sharply to make a new low. Moves like this are usually tested. And this occurred yesterday. The test set up a picture-perfect Wyckoff Spring. This is one of my favorite long-side setups where the market rejects lower prices and starts to trade higher.
Sometimes, springs take right off like this one; at other times they may hesitate a bit and test the spring low before heading up. In either event, springs are a valuable setup to know. You can learn more about them here: Wyckoff Springs.
Conviction was high off the spring and we see follow-through in the overnight session. We’ll watch carefully this morning to see if the market is able to hold the support level around 1310 – 1308. If it is unable to hold here, we may fall back into the trading range, though this seems less likely.
Also be aware of the 1315 – 1320 area above. Higher time frames have resistance here and we would be getting overbought on the lower time frames should the market continue its rally off the spring.
Gary, I agree with your comments regarding the Spring itself. There was clear buying there, lower prices were rejected and as you stated there was conviction on the Spring. However if you look at the formation of support to the left on the 5 minute bars chart withe volume I understand that there must be evidence of buying, I cannot see any on the 5M chart. Instead I see a rapid wide spread reaction then a very tentative slow rally overnight. Now when I compare this to the action leading into the spring I see increasing volume on down bars & decreasing volume on up bars. Looking back it is a terrific Spring but at the moment the Spring was formed I concluded that there was not enough evidence of buying at the formation of the overnight low, based on my comments above about the reaction and overnight rally. Your comments would be appreciated on what you would consider was the overriding evidence to go long and why my conclusion was flawed. Overall I would like to state that your webinar on the Spring is outstanding and has contributed tremendously to my increasingly deeper understanding of market action. I would thoroughly recommend the Spring webinar to anyone interested in getting a deep understanding of what is probably one of the most consistently successful long setups in any time frame or any market.
Good question, Brendan. Volume in the overnight market does not match that of the US session. It hasn’t for as long as I have been trading. This may change in the future, but for now, when comparing volume on waves and key reference areas between the overnight and US sessions it’s an apples-to-oranges comparison. This is why I generally don’t bother displaying volume on the overnight charts.
So what makes this a “terrific spring”? A number of things:
1. it occurs after the down move has been underway for a while and there was evidence that it was coming to an end.
2. there was clear SOT. Buying had been coming in earlier than expected over the previous two days
3. the Supply Line had been broken (two times: once above A, the second as it pushed up to 1310.00). This is demand coming in.
4. the sharp move down at A had no follow-through. Instead, we see a good rally back up and above where supply came in on A. Weakness doesn’t act like this. Think Shake-Out.
5. the wave structure had changed. Up waves had increased.
6. overall volume on the day was the lightest volume of the week. Given the low volume, it was unlikely sellers would take the market down
7. Volume did not increase substantially on the break below support (see 6). Instead, volume came in on the rally off the spring bar (5-minute chart, which had also reached an oversold position on that chart).
Try not to focus on one aspect of the chart. We psychologists call this “salience”; it is a cognitive bias of over-emphasising one feature to the exclusion of all others. This impairs decision-making. We want to take a more wholistic view. My mentor always emphasized that we always want to try to construct a “Wyckoff Story”. It was his way of side-stepping salience, and this is the way to construct that story. It doesn’t ever mean that the spring is guaranteed. It can still fail. But when you have such a story, the odds favor that the spring will respond.
Gary