Mr. Wyckoff believed one of the advantages of Tape Reading is that one could watch the entire market for clues. Of course the market then was much smaller, but as I have been pointing out, the options market has a disproportionate influence on stock and futures prices, and it is frequently ignored by Wyckoff traders. Please notice how high the level of put buying rose in July. In fact since our last options expiration it was below the blue line only once. As of a week ago Wednesday, the put holders were there to be squeezed.
One week ago Wednesday was the selling climax in a spring(?) position followed by the test of the spring on Friday. Wednesday prior to opex begins the very rapid fall off in time premium and not coincidentally that was the bottom of the move. Then began the short covering rally driven by put owners closing their positions, buying calls, buying futures or long etf's. In my last post I showed how strong this rally was, it was so strong because it was driven by panicky short covering originating in the put owners and spreading to other shorts as well. Interestingly the move in prices created the news, not vice-a-versa. For example, if prices were falling, Intel's gross declining around 15% and revenue declining in every sector except China, and Intel's offering guidance for the third quarter all would have been emphasized rather than its profits.So we have our hypothesis, this is a short covering rally. Short covering rallies end, when the last short has covered. The source of demand has then exhausted itself. On Friday the strikingly low volume at the top of the rise signals a lack of demand and that the short covering has ended. This low volume was in the etf's shown and the QQQQ which I might post separately. Since it was opex the NYSE volume would not have been a good measure as it almost always goes up on opex.
If our hypothesis is correct, and no new demand kicks in what can we expect? A very rapid drop in the market. This drop might be preceded by an upthrust of the 95.51 high. We have seen many times that this market upthrusts after demand is exhausted to get every last share.
The one caveat to this position would be serious weakness in the dollar which moves opposite the stock market recently.
