Dow Jones Industrial Average May do a Classic Wyckoff Retest

Have you ever walked on a frozen pond before?  Do you remember how you walked very carefully over it and then probably stepped very lightly on the ice to ‘test it’ to be sure that it was solid enough to keep walking further?  Well we may be close to a similar process in the DJIA.  Within the last few trading days on the Dow Jones Industrial Average we saw a huge sign of strength price candlestick breakout above the April 2010 range.  Since then the DJIA has moved flat to very slightly down.

A classical Wyckoff Retest occurs when price sells off (on preferably very light volume) right back to the breakout point.  In the case of the DJIA it would be very normal to see it trade back down to 11,217.  If the DJIA is not able to get down that far then we must presume that there is still enough strength in the market to power higher.  If we do trade back down to 11,217, then I would want to see a REJECTION from that level in the form of a bottoming tail on the candlestick.  The irony of these classic Wyckoff retests is that they tend to get a lot of people bearish at exactly the wrong time.

Assuming we do get a classic Wyckoff retest, I would definitely not want to see a move below 11,217 on the DJIA.  It is a must hold level.

djia20101108

I indicated in previous post that it was likely we would see the daily RSI start to moderate down a bit back to the 70 range line for a new buy signal.  I am still working with that theory.  We were extremely overbought on the daily charts on the sp500.  The RSI on the sp500 is now 76.44, not quite there yet.

In other news the percent of stocks above the 50 day moving average is pushing higher again.  At some point I think it will get exhausted and we will see some more involved correction.  I think the indicator is sort of moving up in a double top formation similar to what happened in 2003 to 2005 time frame.  You can see that there were two separate occasions where it double topped and then caused the market to correct longer in December of 2004 and then June of 2003.

Posted in Index Trading, Market Timing, Technical Analysis
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2 comments on “Dow Jones Industrial Average May do a Classic Wyckoff Retest
  1. ed says:

    I heard today that the AAII sentiment survey is the most bullish since Feb of 2007. If you check the chart back then, you will see we did get a correction that lasted about a week

  2. Tom says:

    WOW. Thanks for that update. Makes sense to expect a 200 point down move in the DJIA from here…

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