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.

More Negative Divergences on Hourly Charts

The hourly chart of the S&P-500 moved to a slightly higher high yesterday but, as you'll see in the weekly chart (second chart below), it hit a significant level of potential resistance at the close yesterday.

The index has lost ground so far today and the hourly charts are now showing more pressing negative divergences than they were earlier in the week...

S&P-500 hourly chart, showing negative divergence on MACD

As the chart shows, the negative divergence on RSI, earlier this week, lead to a quick 30-pt drop on the index. The lower band on the hourly chart quickly came to the rescue, however, and prices rallied back towards the earlier highs.

Those highs were surpassed yesterday. The new highs on the index were not, however, accompanied by new highs on hourly MACD and, as such, we now have a glaring negative divergence on MACD; infact, if you look closely, you'll see that there are two negative divergences on MACD; the most recent one resides within a larger one.

If the potential sell signal confirms itself, we'll be looking for a move to the minor support area at 752-767, at the very least.

While the negative divergences on the hourly chart are short-term sell signals, at best, the reaction to the 20-week moving average, as seen on the weekly chart (below), is the big "Kahuna", as it were...

S&P-500 Weekly chart, showing potential resistance from 20-week Moving Average

Notice that yesterday's highs (832) coincide with the 20-week Moving Average. The index was not been able to move above its 20wMA since June of last year. If/when that level is broken (and stayed above), an intermediate/major buy confirmation signal will have been generated.

Until/unless that happens, traders will want to be on high-alert to the possibility of an abrupt bearish reversal.

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