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Too Late to Panic (?) August 21, 2015

Posted by Tom in Thoughts.
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OK, we had one Hell of a week.  With the main reason being that no one wanted to be the last one running out the door.  Yes prices of just about everything got clobbered.

NASDAQ

But notice how volume, up until Friday, was pretty modest if not low.  Lack of Demand (buyers) coupled with only sellers who wanted out at any price.  The Sentiment indicator (above the chart) has been negative but I doubt that anyone predicted this amount of move in 2 days.  Note the Money Flow indicator is only mildly negative.  Humm.  IF I was a betting man I’d expect a big climax selling wave Monday morning.  What happens in the afternoon is important.  IF this is only a quick down turn then I’d expect to see the Smart Money step in (stopping action).  IF not, then we’re headed down even lower, perhaps 5465’ish, and that would hurt.

No need to show what sectors are doing because no one was spared.  Only very select healthcare and tech stocks are holding up for now.  The pie chart below shows the overall price  strength within the S&P 1500 stocks.  It’s ugly!

Price Strength

Be extremely careful IF you go bottom fishing and slowly scale into any position.  Above all be patient was allow price and volume to confirm strength, then keep a tight trailing stop just to be sure.

Next I’m going waay out on a limb at totally re-label Wyckoff points on the NASDAQ Composite Index.  Note that these points ARE NOT the way one is suppose to label, but I am experimenting with Accumulation and Distribution wave strength in order to ID key points.  My philosophy is that indexes and derivatives are much harder to label than stocks and don’t behave the same.  The reason is that indexes and derivatives do not have a fix number of shares issued or “float”, therefore Supply is not fixed.  If Demand is (technically) infinite and Supply is also, that “dulls down” the readout of a bar chart.  That’s my theory.  Note that Wyckoff Theory still works, it’s just a lot more subtle.

Wyckoff Wave

Note the height / value of the green Accumulation wave in reference to the proceeding red Distribution wave. (click on the graphic to enlarge it)  I understand that a UTAD is suppose to be above the BC (buying climax) but in the case of “non-stocks”, I may be more interested in the lessening strength of Accumulation while the Distribution strength does increase.

What does this mean right now?  Well, it appears that the Distribution (red) wave is not that terribly strong right now.  Yes it is much more than the proceeding Green wave, but look how it compares to previous Distribution waves; not as much strength.  Question: Did the CO / Smart Money do their selling back in early July and early August on those larger red waves?  I’m not sure really, but the idea is intriguing to me, and even more so IF I can measure it.  What would be nice to see is that red wave to “dry up” (return to zero) and a healthy green wave begin.  IF the red wave continues to head “south” that’s not good.  Patience and confirmation are the likely words right now.

So I’m just throwing this idea out there to fellow “Wyckoff-ians”.  The idea of not being to hung up on traditional labeling, especially on “non-stock” instruments.  Cheers and have a good week.         …………  Tom  ………

pie chart by http://www.HighGrowthInvestor.com; charts by MetaStock. used with permission

Comments»

1. hlask - August 22, 2015

Very interesting post Tom…. lots of food for thought here. I have a few comments and questions:
1. I have been thinking along similar lines for a while with respect to looking at indexes and labelling. What are your thoughts on looking at futures markets? – here the volume picture does reflect true supply and demand – each contract represents a buyer and a seller so the economics of supply and demand should play out and be clearly visible on the charts.
2. To some extent the volume picture may be masked by holiday activity. To take this one step further if the COs intention is to mark down prices then August is the ideal time to do so particularly once a significant trading range has developed. If the ‘market’ has been conditioned to buy support then the CO who is positioned short will have to absorb demand at support levels, that demand will be less significant during August and therefore the marking down process is easier – notice how similar both in structure and timing the 2015 picture is to 2011. Long positions who are on vacation are now trapped by the swift move down.
3. I am intrigued by your wyckoff wave strength – I assume that this is an indicator you have developed yourself – what is the reasoning and mechanics behind it?

As always good reading your thoughts! Cheers Howard

Tom - August 23, 2015

Hi Howard –
1. Futures: Yes Supply and Demand are directly related and (pure), i.e. for every Buy contract one must have a Sell, but supply is not constrained as with stocks, since stocks do have a limited number of shares (float). I guess one could argue that the float is only relivent to smaller companies, since large cap stocks have many millions of shares.
With indexes and EFT’s they (should) represent a basket of stocks (or other indexes). Therefore I’m thinking do most of them hit key Wyckoff points at the same time? (Take for instance EEM, which represents emerging markets. Do the stocks in Brazil, China, India and China hit key points at similar times? Maybe or . . . )
My point is Price and Volume are more “sharp” with stocks, then futures, then ETF’s, then Indexes. It’s NOT that they don’t work, just less acute. After all, averages are, well, average and not individual issues.
2. Yeah, I agree with the timing of this down trend plus the swiftness of it too. The real “test” of this “correction” will be the coming week. How much panic will be installed into the minds of the public? We’ll know Monday. 🙂
3. I’ve been experimenting with this indicator, so it’s not fully developed. The idea involves counts the number of Initiating Buy & Sell days (a concept by Carl Fortunia) and factoring in key VSA bars (bullish & bearish) then using the (old school) Taylor Rule modified for 5 days instead of 3 days. I’d be happy to share it, but it needs verification. I’m just experimenting with it right now.
BTW, a pure label of the NASDAQ Index would have put the BC way back in March, with the UTAD in August. A upward sloping Distribution structure. Now for me, that’s real hard to see in real time (i.e. early last week); only in retrospect (and we’re all good at that). 🙂
Cheers Howard. ….. Tom …..


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