Last Update

 4.21.13 – Added $IWM and $FAS analysis

Related Article(s)

Article from 3.20.13 – “Market is Topping Out”

Article from 4.27.13 – “$IWM $RUT Researching 13 Years of H&S Reversal Formations [VIDEO]”

Article from 4.30.13 – “$SPY Trading at a Pivotal Level [VIDEO]”

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4.19.13 Friday

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$DIA: Dow Jones Ind. Avg. ETF

(Daily) Uptrend Support Broken

This is first time in a long while that the bears were able to break this solid uptrend support.  As you can see from back in October 2011 that once the uptrend support has been broken, market correction was imminent though bulls did try to get back up. But technicians know that “old support becomes new resistance” and I believe we probably will see some bounce next week to test that broken support as new resistance. Once that resistance holds and bulls fail to break above, I believe the true strength of it’s correction will be displayed.

Also I won’t be surprised to see H&S pattern formation in the process of that new resistance testing phase.  We can already see that pretty defined left shoulder, head and now possibly in the making of that right shoulder in the phase of testing that old support as new resistance.

(Daily) Negative Divergence Can’t Be Ignored

One of the reasons of why we can’t ignore these negative divergences is because it happened before and when it happens, it played out every time.  This chart is showing us to pay attention because it has high probability that it could play out yet again.

These divergences happen because market continue to push while the strength of it’s recent move is weak thus while this index made higher high, MACD made lower high (negative divergence).   This reversal pattern is very crucial and lethal when it happens at the top of it’s long bullish run as you can see on this chart.  It’s not important because of the divergence itself but it is important because the location where it has formed and this divergence is confirmed and aligning with other analysis that confirms that we are at the topping level.

(Weekly) Looking at the Big Picture

We are looking at about 10 years worth of data here on $SPY.  I believe we are at the peak of it’s current bullish move and the correction could be coming back down to meet with that this primary uptrend support which is about $136 level.  I will have to re-evaluate when we get to that level of $136 to see if we are facing some kind of major market crash but as of now, I believe that we are at that tipping point looking at this bigger scale chart.

The pattern of the bullish trend since 2009 is very much contrasting compare to the bullish trend we had back in 2003-2008.  Today we are forming in the fashion of sharp uptrend channel with lanes (lanes meaning, it travels within the boundaries of this uptrend channel but at times changing its lanes from the lower side of the channel to the upper side of the channel while bounded by the lanes).  We are currently caught up in that middle channel line which is acting as resistance. If we start to fall from here, it is very much likely that we could come back down to that lower channel support level.

In my opinion, it probably is better for the market and the economy if the correction happens in a usual formation. What I mean by that is just coming straight down to that primary trend support and find support and continue to make higher lows and higher highs on this chart. However if we come down to $136 level and bounce but fails to make another higher high and stops short thus creating some kind of H&S pattern at the top of it primary trend, could be exceedingly dangerous warning sign for the overall market.  As you can see back in 2007-2008 that’s exactly what we saw.  We created three peaks at the top of it’s bullish move but it failed to create another higher high thus creating that right shoulder level on that initial H&S pattern.  And rest was history.

(Weekly) RSI Tells Us the Story

We are looking at about 14 years worth of data here on $DIA on the weekly chart and as you can see that when RSI hits that extreme overbought status, it always lead to some kind of corrective move subsequently.

2 out of 4 times (50%), it was the early signal before the market fall.  1 out of 4 times (25%), it was the early signal for topping process for a steep corrective move.  1 out of 4 times (25%), market moved sideways for months.  Given the fact that weekly RSI is at a extremely overbought status at the top of it long bullish move, I believe we have high chance of a steep market correction or more at best.

$SPY: S&P 500 ETF

(Daily) Uptrend Support Broken

Analysis is simple as you see on this chart here.  It breaks uptrend support, $SPY tries to get back up to test that old support as new resistance, price fails to go higher, move is rejected, and then this thing tanks.

We are looking at exactly same scenario here today.  Does it have to happen again as it did before?  No it does not but it has high chance and probability that it will.  Not because of this chart alone but because we have bearish reversal formation confirming not only on $SPY but on $DIA, $QQQ, $FAS, $IYT, $IWM.  When you have bearish reversal signals on all other indexes, you pay attention to these signs of broken support.

(Weekly) Major Warning Sign

This is a major major warning sign of the market crash because the location where these negative divergences have been formed.

Triple top formation alone at it’s major resistance is a significant warning signal but on top of that, we also have bearish divergence confirming on this weekly chart. (currently this weekly bearish divergence is NOT yet confirmed but getting close).  I do think the divergence today is weaker than when it happened in 2007 and 2000 as you can see the angle is not as steep.   But that fact alone should not encourage us to dismiss this fact but to be warned and take heed that this beast of bears could wake up on any moment. (“Any moment” does not mean soon as we are looking at this weekly chart. It could take months before we see some major downside move playing out.)

$QQQ: NASDAQ Composite ETF

(Daily) Uptrend Support Broken

This chart itself explains things pretty clearly as well.  Uptrend support gets broken, it tries to come back up to test that as new resistance, price fails to go higher, correction comes.

More alarming fact about $QQQ is that we have this gigantic size of H&S pattern in formation. Some may argue that it doesn’t quite look like H&S pattern but H&S is basically when the stock fails to make higher high, creates lower high which is equal or close to the price level of the left shoulder.  And we have all of the criteria on this $QQQ daily chart. H&S measured target is about $54.

Again H&S alone is not such a big problem for this market but we have so many reversal signals that confirms each of it’s own analysis and when that happens, we pay attention to the pattern such as H&S.

(Daily) Negative Divergence Can’t be Ignored

H&S pattern plus the negative divergence. This is like a fire with a fuel. First, take a close look at that whole picture of MACD there. Can you see that each divergence created lower high and that in itself is a negative divergence because obviously $QQQ made higher high on August 2012.  Left shoulder was created with the negative divergence, also the head and the right shoulder as well.  Think of it as each peak carries it’s potency of bearish sentiment.

(Weekly) Looking at the Big Picture

I believe we are going to come down pretty fast here on $QQQ and break this uptrend support to about $54 and then get back up to test that old support as new resistance just like it did back in 2008 peaks.  In the event that we break below this weekly uptrend support, I believe things could get ugly pretty quickly.

$COMPQ: NASDAQ Composite Index

(Weekly) Major Warning Sign

This weekly chart is very much alarming because we had similar warning sign on $SPY which I mentioned on this post. Take a look at this weekly MACD negative divergence closely. From 2006-Today, when it confirms weekly MACD divergence, it ALWAYS lead to market correction and one time resulted in market crash.  This is a sign that you can’t afford to dismiss because on this chart, this sign has performance ratio of 100%.

It is alarming because it happened before and it was an early indication of market crash back in 2007.  Actually today we have stronger reversal formation on this MACD negative divergence because back in 2007, MACD essentially created flat top while NASDAQ made higher highs.  Today, NASDAQ made higher highs and MACD is continue to create lower highs which signifies stronger bearish force coming in on this recent bullish move.  Again we are looking at the weekly chart so it could take months before we see anything happening but I definitely won’t be ignoring these early indications.

(Weekly) Major Warning Sign II

Not only we have confirmed bearish divergence on the weekly MACD but we also have confirmed divergence with weekly RSI on NASDAQ.  This is very concerning matter because of the prolonged formation of the recent divergence (about 1 year 2012-2013).  We saw something similar back in 2007-2008 which was an early indication before the market crash.  I am not suggesting market crash is coming soon but I am seeing the warnings signs flaring that it could.   Obviously we would need more data to support that fact and probably need to re-evaluate in 2-3 months to see if we are continue to build lower highs on this weekly chart.

Nonetheless, these are warning signs at best that at minimum steep market correction is in-stored.

$IWM: Russell 2000 ETF

(Daily) Uptrend Support Broken with H&S Reversal

Back in October 2012, we have broken uptrend support and this thing had its moment of correction for about a month. But today we have stronger reversal formation with confirmed H&S reversal formation and of course uptrend support is already broken.  H&S reversal measured target is at around $84 to fill that entire gap from early January of this year. This is concerning matter at best because $IWM is already starting show great weakness while S&P 500 is still showing somewhat bullish resilience.

(Daily) MACD Negative Divergence with H&S Reversal Relationship

I don’t have to explain much here as the past (May 2012) H&S reversal pattern with the negative divergence resulted in pretty steep correction.  Today, we already have the negative divergence confirmed with MACD rolling over and H&S reversal starting to really play out here.

(Weekly) RSI Tells Us the Story

On this weekly chart as you can see RSI reached overbought status 4 times during its 7 years period of time and subsequently it resulted in some kind of market corrective move.

$FAS: Financial ETF

(Daily) Uptrend Support Broken

“Old Support Becomes New Resistance”  This is the phase where it’s going to fake out many investors/traders as the market start to get up again to test that old support as new resistance.  Many will say everything is back to normal and this bullish trend has not died yet.  This is the phase many will say market will bounce however after short while they will realize (not knowing old support becoming new resistance), after a short bounce, it will change its direction and when it does, it will change it’s direction FAST.

(*I like to look at financial sector to give me some early indication of overall market as financials are usually very sensitive to overall market’s health.  Most times, financials analysis could give us that edge of early indicative signs.)

(Daily) Negative Divergences

(Stochastic, RSI, MFI)

We pay attention because it happened before and it lead to a STEEP correction back in May of 2012. Look at that “NASTY!” angle on that Stochastic. So dirty… Last time these divergence confirmed, $FAS lost 13 points that was 36% correctional move to the downside.

(Weekly) ADX (Strength Indicator) Tells Us the Story

Strength has been dying for weeks as the weekly ADX is starting to roll over while $FAS continue to grind at this important pivot level (resistance of $57).

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Final Thoughts

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I believe we are in the process of market correction and topping out phase here.  It’s still early to say that market is going to crash but definitely warning signs are flaring.  But I wouldn’t worry about that for now because I think we will need to re-evaluate in about 2-3 months to see if we have any substances for that.    Next week or two, market could have short-term bounce  but I think this is a phase where it’s going to fake many investors out where they are going to think that everything is back to normal.  This is a time where I will be scanning through different stocks to find a good short setup for swing and position trading.

And here is the reason why this is something I won’t be ignoring. We just looked at $DIA $SPY $QQQ $COMPQ $IWM $FAS and every single one of these ETFs/Index have starting agree with each other. What I mean by that is they are all flaring same signals.  Weakness, divergence, broken uptrend support, and trading at a major pivot level.  This is where the beauty of technical analysis can really flow through these analyses because they are harmonically in-syncing signaling same message.  “MAJOR WEAKNESS”

(Daily) Bonus Chart $RUT vs $SPX

H&S reversal formation on $RUT (Russell 2000 Index) is starting to confirm while $SPX (S&P 500 Index) is still grinding higher

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Related Resources

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4.16.13 Tuesday

5 Reasons Why I am Shorting the Market

by Brennan Basnicki

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4.24.13 Wednesday

“Why the S&P Will Correct Q2/3” Abby Doolittle