Double Divergence and Resistance in SP500

Jul 22, 2009: 3:37 PM CST

Structurally, after the recent rally from the 875 lows, the S&P 500 is challenging possible resistance at the 955 level which comes from both the January and June 2009 highs.  We’re also picking up an internal negative momentum divergence along with a TICK (high) divergence at these levels which should call our attention.  Let’s look at the structure.

Let me begin by saying there’s absolutely no guarantee price will inflect downwards off these levels, but due to these developments, it would seem that risk is to the upside and opportunity might be to the downside.

As price swung upwards off a clean positive momentum divergence into the July 8th lows, we had a new TICK High of 1,400, which was a first sign of strength.  As price swung back to form a higher low – complete with 60min dojis at those lows – we then began the large momentum move up that we see to this day.

However, the momentum may be trailing off as the 3/10 Oscillator is showing divergences (which isn’t as significant as the TICK divergences – oscillators can give false overbought readings on a powerful up-move).

More importantly, the TICK is showing internal divergences with the daily high TICK reading as price has continued higher – both of these serve as non-confirmations of the recent highs.

Now that price has come into prior resistance – which also reflects roughly the 38.2% Fibonacci retracement from the May 2008 highs to the March 2009 lows – odds have shifted to favor a downside move, or at least a low-risk (stop slightly above the highs), high-reward trade opportunity.

I’ll be exploring this and other insights in today’s “Idealized Trades” report for subscribers (please click to learn more information), but I wanted to highlight this structure to you as a good example of divergences in the (potentially) latter part of a price swing.

Corey Rosenbloom, CMT

6 Comments

6 Responses to “Double Divergence and Resistance in SP500”

  1. P.K. Says:

    Want one more piece of evidence to add? Using a log chart, connect a trendline from the May/Aug '08 highs and we're right there.

  2. Anonymous Says:

    Great post – I really enjoy your analysis.

    I have another question. What do you make of all the academics, psychologists, and value investor types who are always dumping on trading and technical analysis. They make it seem like all the great trading success stories are simply “luck” that eventually runs out, and that it's impossible to do any better than holding an index fund.

    I have been paper trading for some time now and am having a lot of success. But I am nervous about going live with real money because I wonder if those people are right. I am relatively new to this and I am open to the possibility that maybe this is just a lucky streak I'm on, or that I'm just “seeing what I want to see” in my results, or that my techniques could just stop working at any time.

    But I still think I'm on to something good, and if there are people like you who trade for a living then obviously this can be done. From what my testing shows I think there's a good chance I could live off my trading profits. It wouldn't be living in Trump Towers but it could pay the bills. Take that, nay-sayers!

  3. Anonymous Says:

    Here is another question. It is said by some that what is required for success in the market is an edge, that the market is a competition and you must possess some knowledge that other market participants do not possess in order to stay ahead of them and consistently profit. They also say that any publicly available information will never give an edge, because if it's available publicly then it is information that everyone else already has. Then they say that any successful trading methodology that gains a wide enough following will cease to work, because once enough market participants have caught on to it, it loses it's edge.

    I don't know if any of that is true or not. Some people say the market is too big, and is approached from so many different ways, that no one method could ever become that widely followed. Maybe so but I'm not so sure either. If that were true then Goldman Sachs would just release their trading codes to the public, so would all money managers and quants, but instead they are very very secretive. Just to be safe I would want to keep my trading ideas super secret. At least until I had made enough money off them, maybe I'm being paranoid, IDK. Are you ever afraid that your ideas will stop working if too many people start using them?

  4. Guest Says:

    Want one more piece of evidence to add? Using a log chart, connect a trendline from the May/Aug '08 highs and we're right there.

  5. Anonymous Says:

    Great post – I really enjoy your analysis.

    I have another question. What do you make of all the academics, psychologists, and value investor types who are always dumping on trading and technical analysis. They make it seem like all the great trading success stories are simply “luck” that eventually runs out, and that it's impossible to do any better than holding an index fund.

    I have been paper trading for some time now and am having a lot of success. But I am nervous about going live with real money because I wonder if those people are right. I am relatively new to this and I am open to the possibility that maybe this is just a lucky streak I'm on, or that I'm just “seeing what I want to see” in my results, or that my techniques could just stop working at any time.

    But I still think I'm on to something good, and if there are people like you who trade for a living then obviously this can be done. From what my testing shows I think there's a good chance I could live off my trading profits. It wouldn't be living in Trump Towers but it could pay the bills. Take that, nay-sayers!

  6. Anonymous Says:

    Here is another question. It is said by some that what is required for success in the market is an edge, that the market is a competition and you must possess some knowledge that other market participants do not possess in order to stay ahead of them and consistently profit. They also say that any publicly available information will never give an edge, because if it's available publicly then it is information that everyone else already has. Then they say that any successful trading methodology that gains a wide enough following will cease to work, because once enough market participants have caught on to it, it loses it's edge.

    I don't know if any of that is true or not. Some people say the market is too big, and is approached from so many different ways, that no one method could ever become that widely followed. Maybe so but I'm not so sure either. If that were true then Goldman Sachs would just release their trading codes to the public, so would all money managers and quants, but instead they are very very secretive. Just to be safe I would want to keep my trading ideas super secret. At least until I had made enough money off them, maybe I'm being paranoid, IDK. Are you ever afraid that your ideas will stop working if too many people start using them?