Upper Bollinger Band (Weekly Chart) Set to Challenge Bullish Trend

We are initiating a new 'Chart In Focus,' today. The markets have had a good run, over the past couple of weeks. The Nasdaq-100 and the S&P-500 have even broken out of inverted head & shoulders patterns that are calling for a continuation in the rally. However, nothing comes easy, it seems. As the markets have rallied, the upper Bollinger bands on the weekly charts have slowly but surely started to fall. The rate of descent has been rather rapid, so much so that the indices are now confronted with the bands.

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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!

-~-~>Tightening The Screws<~-~-

Last Tuesday, we showed you how the bollinger bands on the weekly chart of the S&P-500 were starting to tighten (see 'Another Sign Of Danger for the Bulls'). The tightening has continued this week.

S&P-500 weekly chart with bollinger bands

Generally speaking, tightening Bollinger Bands are a sign of a decrease in volatility on the level of trend that is being featured (in this case, on the intermediate/major trend). The interpretation of tightening bands is that the trend is in a stalemate as opposing forces (bulls and bears) play a game of 'tug of war.' None of the sides is stronger than the other at the present juncture and as such the fight continues until one side gives up or is defeated. Once that happens, the energy that has built up within the coiling pattern is released and prices burst out of the consolidation zone and into a sharp new trend.

Coming back to this specific chart, you'll notice that over the two weeks preceding this one, the lower band was rising and the upper band was actually falling slightly. This week, the lower band has continued to rise but the upper band has actually flattened somewhat. Strictly speaking, that still constitutes a tightening because the dispersion between the bands is still falling.

Nuances aside, the important fact to note is that prices have now moved to the level of the flat upper band and, one would assume, will face stern resistance from the same. The bulls will need to muster the strength to push the upper band out of the way fairly soon, if the index is not to find itself putting in a minor/intermediate top at around these levels.

Another Sign Of Danger for the Bulls

Take a look at the weekly chart of the S&P-500, specifically the Bollinger Bands...

S&P-500 Weekly: Tightening Bollinger Bands

Do you notice how the Bollinger Bands are tightening. Look at how the upper band has started to bend inwards and is falling heavily on price action?

Now, it is only the middle of this week. So, if there is some upside action over the rest of the week, which is a holiday shortened one, there is the possibility that the band could be pushed out of the way by the rising prices. But if the index closes Friday at these levels or lower, watch out! This is a recipe of disaster. At the very least, a move to the 20wMA (1040) will be called for and, if that level then breaks, a move to the lower band (currently at 955 and rising) will be on the cards.

So keep an eye on the weekly close of SPX. The bulls will want to ensure that there is a much higher closing than the current 1100 or so (preferably above 1125-1130). The bears will want the index to close the week at or below 1100.