Tuesday, 28 September 2010

8:22 BST - SPX Update: 60 min time and price chart - early signs of a top, but price and indicators now need to confirm

When I last posted this time and price chart, SPX had broken down into the lower half of the price channel for the first time since the rally that started at the end of August - see last Thursday's post here. To me, this  was an inital sign of weakness creeping into the rally. 

It actually broke down out of the channel at the end of Thursday, though didn't close outside of it. As you can see from the updated chart, Friday's rally took it back up to the mid line of the channel and it duly spent the rest of the day crawling along the underside of the mid line, which was a possibility I mentioned in that post. An inability to get over the mid line would, as I mentioned, also be a sign of potential weakness, perhaps suggesting that an end to the rally would be close:

SPX 60 min time and price chart:

Yesterday, it fell away from the mid line and the rally into the day's high failed to reach it. This looks bearish, coupled with the divergences that I've marked in the indicators between the high in price made on Friday and yesterday's high (along with the larger divergences between yesterday's high and that of 21 Sept).

Still, the RSI and CCI continue to remain at bullish (to neutral in the case of RSI) levels. If we've seen the end of the rally from the August low then I want to see these indicators turn decisively bearish along with a significant decline in price. For RSI that means falling to the 30 level. For CCI that means falling at least to the zero line, but better still, below it and towards the -100 line.

The MACD histogram has turmed slightly negative which means that the MACD itself has had a bearish cross. However, the latter is still above the zero line. It needs to drop below that line to confirm any bearish move in price.

The stochastic has had a bearish cross, but remains in the overbought zone. We need to see it fall quickly to the 50 line at least, with a good decline in price.

You can see that we're coming into the next time line today, so it would be a good area for price to confirm a top to the rally from the August low, even though it has not quite hit the next price level at 1156. If we have seen a top, then price should fall decisively below the channel and not be able to recover it and we should start seeing the downward price levels (in red) get hit. Moves in the indicators as described above that accompany such a price move would help confirm that perhaps a top to the rally is in.

If we don't see all or any of the above, then it'll be a warning to be prepared for more upside. In particular, I don't want to see price decline but the indicators fail to reach their respective bearish/oversold levels, or price go sideways, but the indicators reach their respective bearish/oversold levels. Those combinations of price/indicator behaviour would be potentially bullish in my view. And, of course, if the channel gets broken to the downside, I don't want to see price recover back inside it.