Monday, April 29, 2013

Stock Market Update 4-29-13 - Bearish Divergence

Click on Chart to Enlarge

This chart is of the SPY etf and is an hourly chart with a MACD and an ADX study underneath the chart.  What we have seen since the April 5th low in SPY resembles an upward "flat" pattern in both price and time relations and indicator behavior.

In the ideal flat wave B should take longer than wave A, and also wave C should take longer than A.  The price legs are often nearly equal creating horizontal or "flat" trendlines - hence the name "flat."

Looking at the indicators we can see that currently the MACD chart is displaying a pretty classic bearish divergence pattern as prices have made higher highs the last two sessions, but the MACD peaked on 4-25-13.  So that is the type of indicator set-up that is typical at a high point in the markets.  Not all divergences lead to pullbacks, but they are the hallmark of the end of price trends.

Also, the ADX can be used in conjunction with the MACD in order to better gauge whether the price movement is likely trending or corrective.  The ADX is a measure of trending activity, and when it is rising, that indicates trending price behavior.  So if the ADX and MACD rise together, that indicates a stable uptrend.  That is what we saw from April 5th through 11th.  Then as the MACD fell and prices corrected back to the April 5th low, the ADX remained above 20 but not rising.  This indicates a relatively strong correction against the prior trend.  Now, since the April 19th low, we have seen the MACD rise, but the ADX trend down.  This indicates a probable counter trend or terminal type of move.

If an upward flat pattern is forming and is completing the current leg up in stocks, then we should require that prices move back below the April 19th low in less time than the C portion of the pattern took to form.  That would shift the price logic to the downside, and suggest that we would see further price declines.  But until that April 19th low is breached, then the price trend is clearly up.