Saturday, December 5, 2009

Signs the Bear Market Rally is waning

Here I show the Weekly S&P 500 chart but without Elliot Waves this time. Since the rally started in march, momentum has been waning on the upside. Does this mean the market can't go higher? No. But it does caution to be on the lookout for a reversal. As you can see, price is bumping up right against the downtrend line resistance from the October 2007 highs. In addition, the Moving Average Convergence Divergence (MACD) (an indicator of momentum) Histogram is not keeping up. Each week price has been making higher highs,while the histogram has been making lower highs for the most part. This is called negative divergence, where price makes a higher high but the MACD, or any indicator or relative price (such as another index) makes a lower high. Until (or if)the indicator (or whatever index is being used as a comparison) makes a higher high, this serves as a non-confirmation, and indicates lower prices ahead. Should the indicator make higher highs, this would serve to negate the divergence. This goes for downtrends as well. For example, as you can see, in March, the S&P 500 made a lower low, but the MACD made a higher low. This is called positive divergence, and indicates waning downside momentum. This indicates a trend reversal is near unless the indicator were to make a lower low, which would negate the divergence between price and the MACD. The MACD has two parts to it, the regular MACD, and the MACD Histogram, with bars. Generally when you get histogram divergence but no regular MACD Divergence (as in this case), you get a pullback, with one final move up (or down) in price for which the regular MACD does not confirm, creating negative divergence. Just because there is no negative divergence on the MACD, that does NOT mean the market has not topped out. Price is first and foremost. There need not be divergence for price to reverse trends. However, the MACD histogram divergence indicates that momentum is waning, although not to an extreme. What could happen is we could get a pullback in the market, with one final higher high to produce the regular MACD negative divergence, which would signal a long term top is likely in place. Key support for this market is the 991 level on the S$P 500. If that is taken out, it will likely indicate the bear market rally is over. However, please remember NOTHING is certain in the market. Traders trade off of the most likely outcome, or in other words probabilities, not certainties.

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