I would like to begin with my addendum 1/29. A basic Wyckoff principle is supply and demand. A careful reading of chapter 7 in the Wyckoff course shows that when demand was exhausted on March 24,1930 the down move began. Mr Wyckoff used as evidence the inability to make a new high on 3/24 and 3/25, but the clearest evidence is the low volume on the rally which fails to make a new high. The volume on 3/24/30 was the lowest full trading day volume in many weeks. The purpose of a range of distribution is to exhaust the demand and by moving shares from strong hands to weak hands to create more potential supply.We are now at the end of a 8 week trading range, see SPY chart(clicking it will enlarge it). On the largest Wyckoff level, just gross price movement we made a high 12/08/08 and only a marginally higher high on 1/5/09. That is bearish. That we break the low of the trading range also is bearish. To rally 50% as we did is the expected bear market recovery. Further the inability to get back into the upper half of a trading range often occurs before the fall through the bottom. Throughout this range volume decreases on rallies and increases on declines, a sign of distribution.
On a more specific level, 1/28 we broke through the top of a little week long trading range and generated little volume or demand. Demand was exhausted at about a 50% retracement, far below a new high. If you look at the intraday of 1/28 the peaks are made on modest wave volumes of 96 and 31, right after an fomc meeting when volume is usually huge. As mentioned earlier the rally into the close on 1/28 was far too much effort for the result and confirmed supply was overwhelming demand as was evident in the previous waves. In these previous waves the wave volume on the declines was much higher than the wave volume on the rallies. Just as the wave ending with a total up volume of 31 on 1/28 shows an exhaustion of demand so on 1/29 demand was exhausted after each small rally. Further we broke back into our small week long trading range on 1/29. With no demand, needless say the trading range tops offered no lasting support.
As of 1/29 we have all the evidence we need that distribution is about complete, that demand is exhausted and mark down can begin at any moment.
Just looking at the wave totals for 1/30 shows a change in behavior, albeit subtle. Until the last 20 minutes the highest volume total on a rally wave is small 103, not close to 177 on 1/28. Others are lower too. Further the wave totals for the declines are all much higher than on 1/28. Please compare the time spent on rallies and the time spent on the much steeper declines for further evidence of how much stronger the selling is than the buying. There is not enough demand for active market players to sell their share on the rallies, like on 1/28, so they are selling them actively and quickly on the declines. The market is saturated and demand from the few buyers is easily filled. This is the beginning of markdown on the smallest intra day level.
If we look at the 15 minute chart, we see the ease of movement is clearly down. Look how the declining bars are longer than the rally bars. Please turn your attention to the last two bars on the 15 minute chart. Notice the very high volume. We do not believe this is demand overcoming supply because the range of both bars is less than the preceding down bar. In fact supply is squashing the attempt to rally.
Finally on the daily SPY chart on a macro level volume and range increase Friday with a low end close, again showing the sellers are in control.
We now need a break down through support on heavy volume to confirm our hypothesis that demand is exhausted and markdown has begun.
