CNBC might be saying that the selling is over, but...

You know, I rarely watch CNBC. I mean, let's be honest, probably the only thing that group is good for is, perhaps for being the preeminent contrary indicator, if you will, when it comes to calling significant turns in the markets.

But for some reason, I decided to turn on the channel a few times today, for several minutes on each occasion, just to get a feel of what the sentiment was like in the, oh let's call it the "fundamentals" crowd... Almost on every occasion, I heard what can only be described as full on cheerleading for a bounce. Several times in the last hour or two, they repeated a seemingly nonsensical claim that went along the lines of "oh, look, the Dow has bounced 20/30/40 points, off its intraday lows (when the index was down 125 points, on top of yesterday's 225-pt drop) and, since every correction over the past several months has ended fairly quickly, this one must be over - given that the indices have been able to hold the day's lows - now."

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It's All Pennants and Flags

The major indices have recovered quite nicely over the past few weeks, and it looks like the bulls may not be spent yet... Several of the majors are showing bull flags or bull pennants that call for some more upside in the week or two to follow.

S&P-500

S&P-500 Large Caps: Bull Pennant

SPX broke out of a bull pennant last week. The run up into the pattern measured 40 points. Therefore, given that the breakout level was 1125, a target of 1165 is derived from the pattern, if the pennant is legitimate.

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Market Update

The holiday season is in full swing and, although it's business as usual in the Members' Area of our site, we've gotten caught up in the festivities and slacked off a bit on the blog. We'll be back to normal programming - providing a handful of articles every week - on the blog soon after the New Year begins. In the meantime, here's a quick update on the state of the markets, as covered in last night's commentary that was provided to members...

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S&P-500 Set to Make New Minor Trend Highs, But...

This posting features the hourly chart of the S&P-500.

As can be seen on the chart, there are a number of signs that favour the bulls over the short run, but as we'll explain in this piece, there are a couple of glaring reasons why there will be a drop to at least the 1040 level before too long.

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Chart In Focus: Blow-off Top? (2)

Blow-off Top (Spike Top) on S&P-500 index chart.Since Thursday of last week, the 'Chart in Focus' has been the trend in volume on the S&P-500 (SPX); specifically with respect to the possibility of the formation of a blow-off top (or "spike top") on the index.

While this instance may not wind up in the textbooks as a perfect representation of a blow-off top (strictly speaking, however, there rarely is a perfect "textbook" example), at the very least it presents a very good case study for why traders need to pay close attention to the trend in volume vis-a-vis the trend in prices.

When we originally featured the then-potential spike top formation on SPX, we mentioned that sustainable bull runs typically take place with a gradual rise in volumes; occassionally, volumes hold steady or even decline slightly.

Rarely, if every, does a major market index...

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Chart In Focus: Blow-off Top In-the-making?

S&P-500 chart highlighting volume trend.The negative divergence on MACD - on the daily charts of the S&P-500 and the Dow Industrials - was the previous 'Chart in Focus.' Despite hanging on well after the markets themselves had moved to new highs, that potential sell signal has finally become defunct. If you look purely at the trend and ignore other aspects such as the bollinger bands, volume levels, momentum indicator readings and so on, you'd get the feeling that its all systems go, and that a continuation of the rally is inevitable.

No doubt, it makes absolutely no sense to fight the trend; it never is. And traders better have a good reason to be opening any short positions, at this juncture. However, whilst trading with the trend makes sense, traders who are successful over the long run also realize that it is important to be prepared for any and all eventualities. After all, markets often reverse course just when most market watchers least expect it to.

So, in the interest of playing devil's advocate, as well as keeping abreast of all potentialities, we're going to focus in on the trend in volumes on the S&P-500, over the next few sessions.

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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.

A Couple of Potential H&S patterns on the S&P-500 Hourly Chart

There are a couple of subtle developments on the hourly chart of the S&P-500. While everything looks fine on price action itself, a head & shoulders formation is showing up on each of RSI and MACD. Now, until/unless the neckline of each of the patterns (see chart below) is actually broken, the uptrend should remain intact. But if the patterns complete themselves, you may be witnessing the first sell signals of a potential bearish reversal on at least the minor trend.

S&P-500 Hourly Chart Showing Head & Shoulders formations on RSI and MACD

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