Major Sell Signal Complete: Negative Divergence on Weekly MACD

This is an update to the situation on the weekly chart of the S&P-500 (SPX), which is our current 'Chart In Focus.' (See original posting)

Just over a month ago, it had looked like the negative divergence on MACD on the weekly chart of SPX, may have been on the verge of becoming defunct. After a stern decline over the intervening period, the strong sell signal has finally completed itself, and this fact does not bode well for the bulls over the intermediate- to major-term, as long as the index remains below its 20-week moving average (1133).

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Negative Divergence On Weekly MACD

This is an update to the situation on the weekly chart of the S&P-500, which is our current 'Chart In Focus.' The potential negative divergence on MACD, on the chart of SPX, was first highlighted around nine weeks ago. The sell signal had not completed itself at that point, but with the markets having sold off over the past couple of weeks, a completion is nigh.

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Negative Divergence On Weekly MACD

This is an update to the situation on the weekly chart of the S&P-500, which is our current 'Chart In Focus.' (See original posting)

The potential negative divergence on MACD, on the chart of SPX, was first highlighted five weeks ago. The sell signal had not completed itself at that point and it actually still hasn't. But, strictly speaking, it has not become defunct as yet, as well.

Until/unless MACD makes a new high (surpasses the peak made in January), the divergence will continue and, as such, traders need to be prepared for the ramifications of the sell signal, were it to be confirmed. A confirmation will take place if/when MACD breaks below the intervening trough (see thin line drawn in MACD pane on chart).

Potentially huge sell signal on S&P-500

So, just how significant could this sell signal be, if it came to fruition?

The best guess at this point would be that a move to the lower bollinger band (weekly), which is currently at 1050, would be the primary target. That represents a 12-13% drop from current levels. Furthermore, note that such a move would barely represent a corrective move within an ongoing bullish intermediate trend. If instead, the markets are ready to make an all-out bearish reversal on that level of trend, a much larger decline, perhaps to the 900-950 range would be on the cards.

First things first, though. Let's see if the negative divergence can confirm itself, or if it will end up becoming defunct. One way or the other, we're taking on a cautious approach at this point and have provided members with a long list of both Long and Short Stock Picks.

As far as the Options Picks go, we've started to provide more advanced trades such as Put/Call Backspreads and Short Christmas Trees with Puts/Calls, in order to be able to pull off a decent profit if the underlying stock moves in the direction we anticipate, and to get close to breaking even, in the event that it goes the other way.

Sincerely,

Asher Pinto

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Negative Divergence Developing on Weekly MACD

The weekly chart on the S&P-500 is our new 'Chart In Focus.'

S&P-500 Weekly Chart

The index has had a great run over the past several weeks. The index hit a low of 1050 in early-Feb and has moved to as high as 1170, this week. A significant development on the Moving Average Convergence-Divergence (MACD) indicator on the weekly chart, threatens a potential reversal to the level of the lows in February, if not to lower levels (perhaps as part of a larger correction, on the level of the major trend).

The development we speak of is a potential negative divergence on MACD, as you can see on the chart. Now it is important to note that this signal is still in the initial stages. A new failure swing low (a breaking of the annotated thin line) is needed in order for the signal to complete itself. If the signal is to be confirmed, it will take place over the next couple of weeks.

So we'll be keeping an eye on the chart and providing updates on this 'Chart in Focus' every few days, until the signal is either confirmed or reversed. Stay tuned!

Chart in Focus: Negative Divergence on MACD (3)

S&P-500 negative divergence on MACDThe negative divergence on the charts of the Dow Industrials and the S&P-500 (chart shown on right), in addition to a few other broad market indices, has been the "Chart in Focus," since Tuesday, Aug 25th.

The potential sell signal completed itself when MACD moved below the intervening trough, last Tuesday, but there hasn't been much followthrough to the downside thereafter. In fact, the markets are virtually back at the highs that were put in place in the week prior to last.

Technicians who follow MACD will be a little wary of the action, however, because the negative divergence is still alive, despite the rebound. If you look at MACD, you'll notice that although the indicator has flattened over the past few sessions, it is still at or just below the level of the intervening trough (on MACD).

A negative divergence is seen as having been nullified, once the indicator has moved back above the most recent peak in the indicator (the level it was at around Aug 28th or so). The markets will have to rally a few more percentage points before that happens.

This chart will continue to be the 'chart in focus,' until the negative divergence is nullified or something major happens elsewhere on the charts.

Chart in Focus: Negative Divergence on MACD

The move to new minor (and intermediate) highs last Friday nullified a few sell signals that had cropped up in the preceding week.

As things stand now, the minor and intermediate trends will be seen as bullish, as long as the S&P-500 stays above the broken resistance level at 1010. The bears have no chance until/unless prices fall below 1010.

However, the bulls should not take things for granted. There is an interesting development on MACD that could put the cat amongst the pigeons. As the chart on the right shows, there is a potential negative divergence on the momentum indicator.

Traders will want to watch the indicator closely, over the coming sessions. If the indicator moves to a new minor high, the divergence will be moot. On the other hand, if it puts in a top below the last high and thereafter goes on to break the intervening trough, a strong sell signal will be generated, on the minor trend.

This potential sell signal has manifested itself on several of the broad market indices. We're using the S&P-500 as a proxy for the rest.

Negative Divergences Abound on the Hourly Charts

The hourly chart of the S&P-500 is showing several potential negative divergences on RSI and MACD. Will these potential signals get confirmed and lead to a small sell-off? Or will the bulls find a way to nullify these signals and carry on their merry way?

If the negative divergences do end up being confirmed, a move to the 752-766 area might be possible, although we'll have to use the momentum indicators as well as other levels on the daily charts in order to arrive at a more solid target.

S&P-500 hourly chart showing negative divergences on RSI and MACD

Hourly Chart of S&P-500

The markets have had a great start to the day. Many are showing gains of greater than 3%. Will the gains hold? You may want to take a look at a few developments on the hourly chart of the S&P-500...

The bullish signs (but):

A potential positive divergence on MACD, which we'd first shown you a couple of days ago. The big test comes today, however. We've extended a line from the middle peak of the divergence; now, MACD has to move and stay above the "confirmation line" in order to complete the positive divergence. If MACD is not above that line, the positive divergence has to be seen as incomplete or even as having failed.

RSI has moved above its centerline. However, if you notice, that has been a reason to sell in the recent past. As long as RSI stays above its centerline, the bulls will be in charge of the short-term trend. If it falls below, we could see the beginning of the next downwards leg.

The bearish signs:

The index has smashed up against the upper bollinger band on the hourly chart. That band is flat to slightly rising at the moment. It needs to start to rise sharply or else the bounce will fail.

Final Comments:

So, there are a few countervailing factors and traders will have to weigh them against each other. The lack of a final selling climax does worry a few traders; we are amongst that list. A handful of analysts have claimed that a selling climax is not necessary and that the steady drip of the past several weeks can be seen as a process of capitulation (that is complete). They may be right. Who knows? We'll soon find out.

And, for what it's worth, Mark Haines (CNBC show host) has said several times this morning "this is the bottom." Okay!