Tuesday, 3 August 2010

11:43 BST - SPX Update

Here's the 60 min chart I posted at the weekend, which I've updated following yesterday's action:

SPX 60 min:

The more bearish than bullish picture that seemed to be the case at the weekend was overcome with the bounce off the lower line of the blue trend channel. However, the market has simply gone back up to the median line of the pitchfork (orange lines) where it has previously failed on two occasions.

Although yesterday's move was bullish, I would be concerned here on the long side given that:

1) the RSI (14), though now above 50, has a bearish divergence against the new high in price and the prior two highs;

2) although the MACD histogram has made a higher peak than it did on the last high in the latter part of July, its still lower than the peak made against the price high marked w. Also, if you look closely, the last bar was lower than the prior bar, so its showing signs of peaking;

3) the MACD itself shows bearish divergence against the two prior price highs;

4) the stochastics may be topping - but its perfectly possible for it to remain at these levels and for price to continue up, so I don't think we can really read too much into this one;

5) the ADX line is even weaker than it was on the last rally into the latter part of July (and it was weaker into that rally than it was into the rally in the early part of July).

None of this means we will get an immediate sell-off, but there do appear to be some headwinds here to achieving much further upside. Perhaps these suggest that stops on long positions ought to be tightened around these levels, just in case.

If things are really bullish, we're going to see the market get above the median line of the fork and turn it into support for further upside and all those bearish divergences may well disappear. However, if it can't do that, the risk is that we drop right back down to the lower line of the blue channel and, quite possible, drop out of that channel altogether this time and head for the lower line of the fork.

If I was looking to enter a new long position here, given that the median line of the fork has provided resistance on two prior ocassions, a simple strategy might be to wait to see that median line get turned into support before taking a position. If I was looking to enter short, the stratgey might be to let price drop back below the median line and for any backtest of it to fail.