Tuesday, April 28, 2009

Bearish Divergence

So I decided to post; which I haven't done in a long time...The chart below of the S&P500 is where we are as of today (4/28/09). Personally, I'm expecting a pull back. And to be honest I've been expecting one for several days. The reason being is because of the divergence between price action and MACD (the middle technical indicator below - it's a measure of momentum). Well, for a long while now, the price of the SPX has been going higher but momentum has been getting weaker and weaker and weaker. Look at the black lines I drew (price goes up, MACD going down)....Also, we're up against resistance at the 875 level and I don't see us busting through that level any time soon. Too much over head supply/congestion....and speaking of congestion, sorry if you can't read my chart because of all the other crap I've got drawn.

To show my observation/thought again....take a look at the 2 year/daily chart below (without all my crap drawn). It might be hard to see it but the same story has happened a few times in the past. Again, the chart below has price action moving up (gray arrow) with divergence on the MACD (black circle(s))...following this kind of divergence pattern, you can see how the price action followed (Maroon arrow - IT WENT DOWN!). Some of the divergences are harder to see than others but the same principle applies. So the questions that pops into my mind is, "Are we seeing this same pattern and should we expect a pullback?". My answer is yes...

All in all, just be careful if your trading to the upside. I feel like there's less risk playing it to the downside but nonetheless, I could be wrong...I frequently am.

-Matt J

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