Thursday, August 21, 2014

Hourly Time Frame Bearish Divergences on SPY - The Current Rally Appears to Be Losing Steam

Click on Charts to Enlarge

These charts are hourly charts, the top one being SPY with a MACD study underneath.  We can see a nice directional advance the last 2 weeks, but now for the first time in the rally, the MACD is not confirming higher highs with price.  So on this short term time frame we are seeing the initial stages of loss of momentum and a potential top development.

The second chart down shows an hourly chart of the NYSE TICK Index, which is a short term measure of breadth in the market.  Again, we see here that the TICK peaked a couple days ago, and the last 2 days prices have been advancing with no increase in the TICK, and TICK currently at a lower peak.  Again, this is a sign that the real directional phase of this rally is waning.

The third chart down is SPY again with a volume and moving average of volume overlay.  Of note here is that the moving average of the volume is also rising to a lower peak and is showing divergence the last couple days.  The interpretation is basically the same, but the thing I find most interesting is that yesterday and again today SPY is hitting fresh all time highs.  And so if there is weakening volume on the breakout, then I question whether the trading algorithms are collectively going to buy the breakout to any substantial level if the first two days at new highs are not attracting larger volume and price movement.  

The bottom chart is the VIX an an hourly basis.  We do see the VIX hitting fresh lows today for the rally, but only modestly so, and in comparison to the VIX low in June and July, the VIX is at a higher level still having a longer term non-confirmation of the price trend at new highs.

So given what I have recently noted regarding the tendency in recent years for swift rebounds the first 2 weeks after a bottom with elevated equity put/call ratios above 1.0, all the above signs would indicate that we could be near the high of the initial rebound.  I don't expect a sharp topping process here, but let's continue to track this 2000 level on SPX for signs of longer term topping or reversal.

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