It appears as though the markets are going through a topping process, though not all of the attributes of a top have been put in place. I mentioned in the About page that my formal technical training came from the Stock Market Institute in Phoenix Arizona. The principles of Richard Wycoff were taught and and the following is a reflection of those teachings.
Before you can start to analyze whether a market top is being put in place you first need to determine an upside price objective for the markets.
At the 13,000 level you can get a point and figure count of 3,150 points and when that is added to the low at 12,500 you get a price objective of 15,650. Another count at the 14,650 level confirms. There is a count of 1,050 and when that is added to the low at 14,500 the price objective is 15,550.
Once the price objective is reached it is now necessary to determine if the next phase is accumulation or distribution.
The first sign of distribution is Preliminary Supply (PSY).
Preliminary supply is identified as action where prices move higher in smaller increments with no significant drop on volume, the shares are being distributed. The demand driving prices higher is beginning to meet more significant supply. PSY itself is characterized by a heavy volume pullback, frequently the heaviest volume pullback thus far in the uptrend. It is the first indication of aggressive distribution, as long term investors begin to unload positions bought at much lower prices, moving stock from strong hands to weak hands.
This pullback is typically seen as an opportunity to buy stocks at better prices by those coming late to the rally. This new demand limits the downside of the preliminary supply to what appears to be a normal correction.
After support is met there will be a move to the upside on increased volume to the upside price objective. Once this objective is reached you can’t just assume that the move is over you need to look at the character of the price and volume action.
At the top of the move to the price objective you will have a Buying Climax(BC) which is characterized by high volume that last a couple of days. The move higher is met by sellers, those who bought at much lower prices. During the topping process the demand tends to be of poor quality, those who bought late in the bull market. You’ll note that on the last day of the buying climax the markets reversed closing down and near the days lows. This is a sign of weakness and a move called an Automatic Reaction (AR). After only a couple of days we have a Secondary Test (ST) where volume initially increases but with little movement to the upside, another sign of weakness.
This is followed by a series of AR’s and ST’s where the secondary tests show very little volume and no follow through to the upside, an indication that the demand is of poor quality. The automatic reactions are taking longer and the volume is greater indicating a good quality of supply.
The rally back to 15,300 is very unconvincing with very little volume and is called the Last Point of Supply (LPSY). The low volume is key to the rebound, as a heavy volume rebound, would suggest more strength than is usually associated with a rally to a LPSY. Such a rally would suggest the topping formation, rather than being near an end, still has further to run.
After a LPSY has been put into place all that is left is the final final breakdown from the trading range. This is called Falling through the Ice and is indicated by the breaking of the horizontal line, though it doesn’t have to be a straight line. Its counterpart at a major market bottom is the Creek, which represents the key resistance level in a major bottoming pattern.
The Fall through the Ice should occur on heavy or expanding volume. Usually, the Fall through the Ice is followed by a rebound rally to test the breakdown. This rebound should occur on significantly less volume than on the breakdown, as a light volume rebound would suggest the drop in prices has generated very little new buying interest.
Last Friday the market was initially moving lower and then it recovered to close the day in positive territory. While the volume was higher it was split in two directions. We should know fairly quickly if the markets have sufficient demand to move above the Ice. A move back above on good volume would indicate that the topping process has not been completed. Should the markets move above the Ice a retest should be expected.
P.S. Monday morning edit:
The rally back to the Ice was just that and the market has proceeded to continue with its correction. There are 2 counts on the point and figure chart. One at the 15,250 line with a count of 1800 points which would give a price objective of 13,450. The other price objective at the beginning of the preliminary supply point at 14,050 with a count of 2700 would give a price objective of 12,550 from the 15,250 price level. The 14,450 – 14,500 level should provide some support for the markets but a move below that point would accelerate the decline.
The market is currently down 215 points at 14,583.