Will a Wyckoff Spring Lead the US Market to New Highs?

Many traders have been bearish about the US market lately, but the technical picture suggests a potential bullish move over the next several weeks.

For this discussion, we will use the daily chart of SPY, the ETF representing the S&P 500 index. The S&Ps are a highly watched index reflecting the US stock market.

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There have been several drops in this market starting with the large down move in early May and culminating most recently with another drive down to July 1. Note that as the market pushed down on May 6, May 25, and again on June 8 and July 1, the volume diminished. Supply, as represented by heavy volume, was drying up.

On July 7, the market rallied vigorously and added over three SPY points in a single day. Although impressive, what is more impressive is that this market rallied back up above the lows of the major drives down since May 6 (green support line). Moreover, SPY also rallied back above the low formed in early February.

The price action of rallying back up above a clear supporting line after trading below it is known as a Wyckoff spring. It signifies that lower prices have been rejected, and there is potential for a significant rally.

Sometimes the rally off a Wyckoff spring will be so robust it is difficult for a trader to find an entry. At other times, the market will test the spring. The market began to test last after stalling at the high of 110.09. This week’s price action (on July 20) indicates the test was successful as the market dipped below the lows of the previous two days and rallied strongly. I view this as a last testing of the supply seen in the drives down (see volume levels in rectangles). As we came back into this area of high supply, volume has diminished indicating that the selling has dried up.

This kind of market behavior paves the way for higher prices. We will be watching this market carefully to see how it unfolds over the next few weeks. The initial hurdles to negotiate are the highs at 110.09 and the 200-day moving average, currently at 111.47 (not shown). A rally back up and above both the 200-day MA and the 113.20 swing high could pave the way for a retest of the April highs at 122.12, or perhaps higher. A push below the July 20 low would cast doubt on this interpretation, and a break below the July 1 low would disconfirm the Wyckoff spring.

By Gary Dayton, Psy.D.