Bearish divergences are beginning to appear in the [[SPY]] and SPX.
I know, you’re thinking, “What could stop this market?” I have no idea. However, I would like to share a few of my personal observations, for what they are worth. Then we’ll take a look at the charts.
Lately, this market has me ready to throw out all my systems and just buy stocks. What stocks? It doesn’t matter. Just get drunk and buy stocks! This is not a good development, honestly, since it is exactly these types of emotional peaks that develop simultaneously with market peaks (and valleys). Something to keep in mind though is that the liquidity that is being pumped into the markets via the short-dollar trade, coupled with global stimulus, is unheard of. Thus, it will likely carry on for some time, leaving my emotional peak early, as usual.
I continue to note a palpable level of distrust among the populace in regards to Wall Street. A rising market restores trust in Wall Street. The economy may double dip, but as long as the market does not, many Americans (including many senior citizens) feel comforted. As their 401Ks are repaired, so are their dreams of retirement. There are many, many Americans depending on a stable, if not rising, equity market. And if the average American needs a rising market, I’m guessing that the financial industry, you know the one earning over 40% of the corporate domestic product, needs a rising market, or it faces self-destruction.
It seems to be in everyone’s best interest to have a rising equity market. Still, I have to guess at what will cause a shift to buying of dollars, and selling of equities, or even worse, both at the same time. When it begins to happen, it will likely will have been predictable in that “everything that goes up must come down,” while simultaneously being completely unforeseeable to most of the American public.
Fortunately we are lucky, compared to the majority of 401K’ers, as we will be able to recognize the early signs of a cracking market. What I am beginning to see are some hairline cracks, which may be repaired, with time. They may also develop into full-blown fractures.
What most concerns me about the current market is that volume is increasingly going the wrong direction, since September. Volume swells on down days and languishes on up days.
Similarly to volume, other technical indicators are beginning to diverge from price.
- RSI(14) looks like it may be making lower highs and lower lows.
- MACD has barely crossed the zero line while traveling increasingly farther beneath it. (More lower highs and lower lows)
- On Balance Volume is confirming my anecdotal volume analysis and is also diverging from price with lower highs and lower lows.
It does appear that distribution has begun. Whether this means we are in a topping process or not, I don’t know. Were it not for the unprecedented monetary intervention, I would say emphatically, “Yes, we are topping! Run for your lives!” As noted above, we are in uncharted territory. Accordingly, nothing is for certain.
Above is the SPX, which for the most part shows the same divergences as the SPY chart, save for the possibility that the divergence in volume is not as strong as with the SPY.
In order for these divergences to be corrected, the S&P500 and the broad markets are going to have to make a really large move upward, or they will trade sideways, or roll over. Given these 3 choices: A large move up, sideways trading, or a roll over, I believe sideways action is the most probable.
I will be watching these divergences closely as the market reaches for new highs.
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