Bearish Divergence Suggests A Pullback Soon

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The hourly MACD is now overbought with sharp bearish divergence suggesting that the market is likely to experience somewhat of a pullback, though the odds look favorable for at least some continuation of the rally afterwards.

Given the large gap down from the day after the election is not yet filled, it may be ideal for the market to push somewhat higher today to fill that gap before experiencing a multi day correction.  Then I think it would be ideal for a pullback to below Wednesday's low before a possible further move upwards.

Stock Market Analysis Video

Stock Market Analysis 11-27-12

This video covers stock market analysis on multiple time frames.  The hourly charts are overbought but without strong bearish divergence which suggests that price action may become choppy before a multi day pullback occurs.

Brief notes on trendlines, moving averages, unfilled gaps, and several technical indicators are covered.

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AAPL Chart Analysis - Probable Rebound Attempt Coming

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As I have detailed repeatedly in recent posts, the initial target for AAPL on this move down off the fall high was the low of the previous base around the $525 level.  On Friday we saw a big swoon below that level on high volume followed by a reversal to close above the old base low.

The candlestick was a very high volume and wide ranging hammer type candlestick.  It is not uncommon for an immediate reversal higher after a break of a major low like that.  Understand what is going on in the market at that point......Obviously many standing sell stop orders would be placed below that low based on chart support for the major uptrend.  So the market will typically push through those points where many orders accumulate to "wash out" the stops before reversing.  And obviously there will be some smart money placing orders to buy just under or at where those last ditch stop orders were placed.

So the bulls took control and pushed the stock higher.  Given that the markets are oversold on the daily chart time frame, I think we may see a multi day rally attempt from this point in the general market averages.

But in the case of AAPL, if the stock does rally from here but later fails and breaks to new lows, that would be a major failure for the stock and may lead to a continuation down.  On a short-term note, those wide range hammer candlesticks have about a 60% probability of future prices moving BELOW the mid point of the tail on the hammer even if the reversal holds.  Given the possibility of a significant rebound attempt in the stock, a set up like that can be followed intraday as prices move back into the tail region and then any upside reversal signals can be taken as long trades and often create an outstanding reward/risk opportunity.

When stocks that are heavily owed by institutions (as AAPL obviously is) top out, they can lead to some sloppy price action and volatile, choppy price moves as the topping process unfolds.

The general markets are not yet showing the typical bullish divergence on a daily frame that is typical of most corrective bottoms.  So I think we may be in store for a rally attempt for several days, followed by new corrective lows before a possible more sustained advance or rally attempt.

If you would like to learn more about the market forecasting techniques that I use to consistently pinpoint market turns and trend changes, then fill out the form on the right side of the page to receive my free stock trading video course, or click on the link above.

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This brief video covers RSI, MACD, ADX indicators and what to expect over the near term.

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Short-Term Oversold, But No Divergence

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The hourly chart of SPY is oversold and the MACD making a bullish cross as I type this.  The daily chart shows prices have been touching the lower bollinger band for a few days indicating that prices are stretched to the downside.  However, there is no bullish divergence on the MACD even at the 30 min time frame, which calls into question whether this move down is bottoming for a major rebound attempt.

The chart above is the VIX/VXV which is shorter term volatility divided by longer term volatility.  In general the shorter term (VIX) should be lower creating a VIX/VXV ratio that is less than 1.0 (indicated by the green line).  However, there are times when the VIX gets higher than VXV.  That usually indicates a point of intermediate term panic in the market and leads to a rebound pretty soon.  The market is out of balance under that condition.

Currently the ratio is not quite at 1.0 yet.  I have been watching this indicator to help pinpoint an upcoming rally attempt.  Of note is that the ratio is higher than it was at the June 2012 low which did not even reach 1.0. 

If it does move above the 1.0 level, I would expect a tradable bottom to occur soon after.  There is no guarantee that it will reach that level before a major rally attempt, and with prices oversold on the daily time frame, I think this is a time to protect open short positions by tightening stops or exiting on appropriate technical signals.

Stock Market in Potentially Explosive Position

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See the chart for notes.  The Dow (and other indexes) is in a potentially explosive downside position.  Using a "stop" order to short on a break below last week's low may be the best strategy in this case.  A stop would be placed above the highs of the rebound off of last week's low.

Of note, but not shown here, there has been a dearth of "smart money" buying occurring over the last week or two compared to the buying that occurred at the June low.  So with the market at obvious trendline/chart pattern support, the smart money is not buying aggressively.  This is suggestive to me that a downside continuation will occur, and probably sooner rather than later.  The next obvious chart support is the June low if a sharp breakdown does occur.

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If the SPY is at a new corrective low by Tuesday afternoon, that keeps the shorter-term price logic clearly down.  So again, entering short (if triggered by Tuesday) on a stop below last week's lows would be my preferred strategy.

The hourly MACD crossed into a sell Friday afternoon.  Since the Sept high, these signals have been good indications of renewed selling and have not developed divergence prior to price move to new lows.  That is typical behavior of a trending type move.  So again, a quick move to new lows would be further indication of a predominant downward price psychology.

While the markets may seem oversold, it is important to consider multiple time frames.  While the daily time frame reading are nearing typical oversold readings, intermediate sentiment readings are not yet at a point that screams of an imminent rebound.  And weekly, monthly, and quarterly indicators all are overbought and turning down.  The weekly stochastics and MACD indicators are not oversold at this point. In fact the weekly MACD has just crosssed down after a bearish divergence, which is typical indication of a larger degree trend change and impending sizable move.  So understand that there is plenty of room to the downside here for prices.

Probable Further Rally

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As discussed in recent posts, the markets were short-term oversold and looking ready for a rebound.  It looks like that has started today.  Based on the recent "waves" up and down I have projected a topping zone for this rally onto the chart with a red box.

I believe this rally is likely to be larger than the green line projected up from the recent low.

We can see that the MACD is just under the zero line and rising.  So it still has several days before a typical overbought signal could occur on this indicator.  I think it will probably be late next week before a possible great short opportunity presents itself.

Seasonally, the first week of November has a bullish bias historically so that may be a tailwind here into the election time frame.

Based on the continuing pattern here, I think that the final upward move since the June 2012 low may be occurring now.  The downward price moves since the Sept high have not been dramatic enough to suggest the psychology has turned clearly bearish yet.

But after this rally, based on my interpretation of the pattern, I think both a shorter and longer term pattern could be complete, which would imply a huge downside reaction coming.  Maybe the markets will sell off in response to the election results??  Certainly the time frame would match in my opinion.

In any case, from a trading standpoint, my suggestion is to look to be a seller as this short-term rally matures.  Watch the hourly charts, and hopefully the MACD develops a classic divergence to tip off a nice short entry.  If considering the long side, the recent action has clearly been a series of lower lows on the hourly chart.  So I think it wise to wait for a rally then a pullback to a higher low, followed by a technical "buy" signal if considering the long side.