Monday, January 9, 2017

Multiple Time Frame MACD Divergence In SP500 - Correction Or Bull Market Top Ahead?

Click on Charts to Enlarge

The charts here are the SP500 cash for the top three (monthly, weekly, daily) and SPY for the bottom chart, which is 60min candlesticks.

The monthly, weekly, and daily time frames are all currently displaying bearish divergence at the recent high on Friday.  Given the confluence and time scale of these divergences, I believe that price may be near a crest.  While tops can be sloppy and drawn out, we have already been seeing that for about 2 years.  

Rather than prognosticate on causes and projections and patterns, what we objectively are seeing is a divergence which truly indicates a "slowing" of the trend.  And the divergences so often occur preceding major changes in direction.  So I imagine that like a ball thrown up into the air will gradually slow before it reaches its peak and then begins to travel back down, the rising market will experience progressive slowing down, until it reaches a peak and turns down.  The smaller time frame divergences, I imagine to help identify the finer timing or reaching of the zenith in price.

So much for theories.  But what has happened in the past under some similar circumstances?

I ran a scan on SPY going back to late 1995 where there was a weekly, and daily time frame MACD bearish divergence concurrent with, or within a month after a put/call ratio sell signal like happened a couple weeks ago in the current market.  I also went through and excludes most days after the first signal day if there were a cluster within a 2 week period.

There result is that there was a negative skew in forward return looking out for a couple months.  It was not real lopsided, but in anycase it does support the idea that stocks may be near a relative top.  From a probabilistic standpoint is the only way we can meaningfully approach it for trading.

The skew is not real strong but is most prominent looking ahead about 3 days and at 1 month.  At 1 month after the past signals, the average closing return has been a mild negative at -0.25%.  And the MAX loss has been about 1.3 times the size of the MAX gain.  The numbers here are not strong enough for me to suggest an inverse trade based on those stats alone.  

So there is not a lot actionable here from the trading front.  But for those who want a larger market context for incorporation into trade selection, hopefully this helps.


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