Do Negative Divergences Signal a Top in the SP 500?

Jun 21, 2009: 10:19 PM CST

For those of us looking ‘under the hood’ of the market right now, we’re seeing multiple negative divergences stacking up – do these signal a key top is in place?  Let’s take a look at the S&P 500 and the negative divergences in Volume, Momentum, and the McClellan Oscillator.

First, we’ve had a 40% rally off the March lows in 3 months – that’s amazing… but not necessarily a reason price *must* go down (one need not be a contrarian for contrarian’s sake).

However, the larger picture seems to paint a picture of a market running on fumes at the moment… or at least currently with higher odds of some sort of reversal here than continuing higher from a technical (chart) standpoint.

First, volume has been steadily trailing down as we hit the summer months, which seasonally have lower volume.  The fact that price is rising while volume is falling is a non-confirmation and is bearish.

Second, we have a steady trailing off and negative divergence in the NYSE McClellan Oscillator (for more information, see definition at StockCharts.com), which is a classic market breadth or “internals” indicator.

In a nutshell, the McClellan Oscillator “breadth indicator derived from each day’s net advances, the number of advancing issues less the number of declining issues. Subtracting the 39-day exponential moving average from the 19-day exponential moving average of net advances forms the oscillator.”

This tells us that fewer stocks are making net advances on the day (relative to decliners) as the McClellan Oscillator peaked in late March above 100 and currently is -50.  That’s also a hideous non-confirmation.

Third, as I’ve been discussing, we observe a negative momentum divergence in the 3/10 Oscillator, which currently has formed three lower momentum highs as price has formed three higher highs – setting up the dreaded “Three Push” Reversal Pattern which often calls the top (or bottom) in a market prior to a decent retracement or full reversal.

Without going into too much extra detail, I wanted to point out these three key negative divergences at least as a warning sign to optimistic bulls or an opportunity to embattered bears.

Keep doing your own analysis for additional insights, but do monitor this situation closely.

Please join me as the MoneyShow.com rebroadcasts my presentation “Idealized Trade Set-ups for the Intraday Trader” on July 1st at noon EST – I’ll be there on a free live chat to answer questions through the presentation.

Corey Rosenbloom, CMT
Afraid to Trade.com

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7 Comments

7 Responses to “Do Negative Divergences Signal a Top in the SP 500?”

  1. shortstock Says:

    Whoa .. corey .. tht webcast is free of cost … awesome, though I'd have even paid a nominal fee for it ;). Thanks mate

    Neil

  2. Huy Says:

    Great analysis! Keep it up.

  3. Trend Day Down Lessons from June 22 SPY | Afraid to Trade.com Blog Says:

    […] mentioned Sunday that odds strongly favored lower prices going forward in my post “Has the S&P 500 topped?” and today’s Trend Day down fell right in line with the daily price weakness I […]

  4. Corey Rosenbloom, CMT Says:

    Thanks Neil!

    The MoneyShow.com is a great resource for similar presentations – most of which are free – just have to register (again, free).

    I'm glad to participate and glad they are making available to everyone.

    Eventually I'll put out subscription/paid content/seminars/chatrooms but I just love the education of it and haven't quite figured out the business-side yet!

  5. Huy Says:

    Great analysis! Keep it up.

  6. Corey Rosenbloom, CMT Says:

    Thanks Neil!

    The MoneyShow.com is a great resource for similar presentations – most of which are free – just have to register (again, free).

    I'm glad to participate and glad they are making available to everyone.

    Eventually I'll put out subscription/paid content/seminars/chatrooms but I just love the education of it and haven't quite figured out the business-side yet!

  7. Trend Day Down Lessons from June 22 SPY | Penny Stock Trading System Blog Says:

    […] mentioned Sunday that odds strongly favored lower prices going forward in my post “Has the S&P 500 topped?” and today’s Trend Day down fell right in line with the daily price weakness I […]