McClellan Oscillator, NYSE TICK, and VIX All Showing Bearish Divergence With SPY

On today's rally in SPY up to touch and close above the 200 day moving average, there are multiple short term divergences occurring.  This indicates that stocks could pull back from this level immediately.  However, in a previous post I had highlighted unfilled gap downs on SPY, with the 204 level being a likely target for this rally, even if the market were to roll over into a bear market.

So currently, that gap is still unfilled and only about 1% above current levels.

McClellan Oscillator Overbought with Bearish Divergence

 McClellan Oscillator is now showing a sharp bearish divergence today after a recent overbought reading.  If stocks are in a counter trend rally to a long term down trend, I would expect the top to occur very quickly.  Counter trend moves tend to create a spiky short divergence pattern in the McClellan Oscillator.  If stocks are going to move to new bull market highs or have a sustained rally, a more sloppy drawn out divergence pattern is likely to emerge.

NYSE Tick Showing Bearish Divergence on Hourly Time Frame

 This is an hourly chart of the NYSE TICK index which is a short term measure of breadth.  We currently see a sharp bearish divergence relative to new price highs in SPY today for the rally up from February lows.  This again implies that the trends ability to sustain is in question.  What is occurring is that fewer stocks are moving higher than were earlier in the move.  That is classic action as a move tops.

VIX Showing Non-Confirmation Relative to SPY

Since the VIX is correlated inversely with stocks, we would expect the VIX to make a lower low when stocks make a higher high.  In this case, the VIX did not quite make a lower low.  The hourly VIX chart shown here shows that the VIX is hovering above the longer tern bollinger band on this time frame.  If the VIX pokes down to this level, that would be further sign of a statistical extreme and probable mean reversion ahead.  So let's keep an eye on this.  But even as it stands, this is a bearish type of signal.

Certainly as price has moved up to the 200 day moving average and daily stochastics shows a bearish divergence, money flow index is overbought, and the short term measures here are displaying bearish divergence, I think that for trading purposes, anyone who is long would be wise to exit.  That way you are out of the market and ready for the next move.  Expect that it will be a few days or more before stocks make a possible top.

Keep in mind the stats I recently showed regarding a SPY inverse etf trade, or a SPY put option trade.   Those looked at price movements likely over the next 1 month.  That study is still young, and implies that with the pop higher today, the reward to risk profile may be even better.


Pete