Hourly chart of S&P-500
Thursday, March 12, 2009 at 11:28AM | Asher Pinto Okay, so the positive divergence on MACD on the hourly chart of the S&P-500, which we'd highlighted earlier this week, has brought about a 66-pt (10%) rally in less than 3 days. That move may or may not be over; it's too early to say. However, there are a couple of potential short-term bearish signals on the hourly charts that traders will want to pay attention to.
Take a look at the chart below...
Hourly chart of S&P-500 Large Cap Index (SPX)
Firstly, note that a couple of gaps have been filled on the way up. The lower of them (Mar 5th gap) was filled during the big move higher on Tuesday. The second of them (Mar 2nd gap) was filled a few minutes ago. These developments, while not all-out sell signals, can actually be seen as a positive for the bears because now the index can resume its downward path without having the damocles sword of a couple of unfilled gaps hanging overhead.
That fact aside, a slightly more pressing matter is the potential negative divergence on hourly RSI. If that signal proves to be correct, we are likely going to see a quick move down to the hourly bollinger band (680, at present), if not to the lows near 666.
There is also another potential (but somewhat weaker) sell signal on MACD. If there the index loses ground for an hour or two, there will be a negative MA crossover on hourly MACD; that's a weak sell signal.
As far as the bulls are concerned, they're still in control at the moment - the rising upper bollinger band (~748) which is quite a distance above current price action and it will act as a magnet if the bears can't get their act together - but traders will want to keep an eye on the aforementioned potential sell signals.
S&P-500 Chart, hourly chart, short term trading 
Potential Negative Divergence on Hourly Chart of S&P-500
With the move that has taken place on the markets over the past several days and the fact that the indices are still oversold on the long-term charts, it takes some gusto to consider a bearish trade on the indices at present.
We're not suggesting that it's necessarily time to start shorting again or anything of the sort - in fact, as we've been saying for around two weeks, it's ridiculous to consider shorting unless it is for a quick scalp trade - but having said that, there is something traders will want to keep an eye on, on the hourly chart of the S&P-500.
Do you see the potential short-term sell signal that we're talking about on the chart below?
It is a potential negative divergence on MACD, of course. The recent run up started with a juicy positive divergence on hourly MACD - you'll remember that we alerted you to the fact when that signal was developing. Will it end with the opposite kind of signal (and, if so, will it be the one highlighted above)?
We shall soon find out...
One thing to note is the fact that the potential divergence will actually allow for a little more upside from current levels, say upto 785-790, while still being potentially legit. If the index moves much farther than those levels, the signal is likely to prove defunct.
Another thing to keep an eye on is the 780-level, which had acted as a stubborn support/resistance level on the way down. The index has found resistance just below that level since Monday. If prices move (and stay) above it, the bulls should have an easy move to the upper bollinger band on the daily chart (805). If prices stay below (or fall back below upon any breaking above) that level, the bears will be clinging on to hope.
Good luck with your trading!
This an update following the FOMC decision, which was released about an hour or so ago.
As you can see on the chart below, the market seemed to have liked what it heard and the index has shot through resistance at 780 and in fact even moved within 10 points or so of its upper bollinger band, which is at 808 at present.
The negative divergence on the hourly chart is actually not completely defunct, despite what one might have imagined. As you can see, there hasn't been a new high on MACD. The divergence becomes defunct only if there is a new high.
So we'd continue to watch that development. The signal is confirmed if/when there is a break to a failure swing low (see confirmation line that has been added to the updated chart). If the signal actually confirms itself, we'll be looking for a drop of 50-75 points (to 725-750) over a few days. If not, we'll have to see how the charts shape up over the next couple of sessions.
Updates on the goings-on on the daily charts of SPX, INDU and NDX will be provided in tonight's commentary, as usual.