Follow Up: Wyckoff Spring in Daily SPY
07/29/2010 12:01 am EST
In my last article for MoneyShow.com, I discussed the daily SPY having made a Wyckoff spring (see that article here). A spring is a bullish setup that occurs when price has dipped below previously established support and rallies back up above that support. It signifies that lower prices have been rejected and paves the way for a rally, often a significant one.
Test of SpringSprings are often tested. A successful test occurs after the spring has established itself with a rally up through and away from support. Richard D. Wyckoff referred to such movement as the market’s ability to rally away from the “danger point,” or the point at which the spring would clearly fail. Further confirmation of the bullish spring comes with a test of that rally. A test is simply price dipping back into the area where supply had been earlier seen, typically on lower volume revealing that sellers—who had been active in that area earlier holding price back—are no longer a significant force. A successful test occurred on July 20.
Since the test, price has rallied and cleared the resistance at 110.09, and as this is being written, price has reached the 200-day moving average. Meeting these two important objectives helps verify the spring. But there are always additional huddles to overcome. We are now approaching the 113.20 swing high made on June 21.
Scale Out and Book Profits
For traders taking long swing positions on the test of the spring at around the 107.00 level, this is a good level (112.00 – 113.00) to take at least a portion of your trade off. I always like to book profits, and scaling out of a trade at this level will allow you to bank about five to six SPY points, depending on entry and exit. Stops on the remaining piece can be brought to breakeven or higher (e.g., below the 110.09 swing high) to ensure a small profit.
Why take profits here? This is an obvious resistance level, and we never know for certain how the market will respond. In this case, the area of the last swing high is also in the middle of the sharp May 6 downdraft. Even a casual look at that day shows a bearish day with very large range and extremely high volume. The heavy activity that occurred in this area may affect price once again as it comes back to this level. I want to protect at least a portion of what has been earned. Besides, if the market continues to respond to the Wyckoff spring and rallies higher, there will be an opportunity to re-enter later.
Anticipating Future Price Action
Looking to the future, this market can find resistance at the swing high and trade lower, going into a more extended trading range. It may also hold its gains in the 113.00 area and trade higher. Given the spring and the fact that the market was unable to trade lower from early May to early July, traders with a long bias have had sufficient opportunity to accumulate shares in anticipation of higher prices. Should the market rally across the upper 113.20 resistance level and push higher, we can look for it to retrace back into this area to re-establish the scaled-out profit or add to long positions.
This breakdown is significant because the broken trend line has accurately defined the bullish trend in gold for at least the past 21 months. The current trend line breakdown occurs after price hovered for about a week above the trend line.
Currently, an immediate downside support target on this breakdown resides in the 1160 price region. In the event of further bearish momentum on this breakdown, a further downside target resides in the 1145 price region.
Although not an absolute certainty, markets frequently return and test a prior resistance area. If price holds, it provides a favorable location for a long trade because the stop point (below the resistance level) and trade risk can be identified as old resistance now becomes support.
By Gary Dayton, Psy.D.
You can learn more about Wyckoff Springs and how to read the market by its own action at the author’s blog and Web site.