Intraday Action Since Last Friday – Divergences

Sep 25, 2008: 10:36 AM CST

Contrary to popular belief, the US Equity Market did not rise when Monday morning’s trading opened… or Tuesday’s… or Wednesday’s… but a lenghty and significant positive momentum divergence formed which has given us in part today’s rising index action.  Let’s see this informational formation and what could be ahead.

We’ll use the SPY (S&P 500) ETF as a proxy on the 15 minute chart:

Envision the large surge Thursday/Friday – this chart only shows a portion of that surge as I wanted to focus on the ‘let-down’ period that has become this week.  I heard many people say over the weekend “The bottom is here! Get back into the Stock Market on Monday!” and while that may indeed be the proper play, I was skeptical for further upside price action – I felt strongly that a retracement at least partially of the large ‘surge’ was due – that has happened but in a much more interesting structure than I anticipated.

First, look at the stability of the downward sloping trend channel than has formed and the steadiness of the retracement so far.  The 20 period EMA quickly resumed its place as overhead resistance and quickly crossed beneath the 50 period EMA – signaling a bearish shift in orientation.

Price formed a few mini-bear flag patterns into positive momentum  divergences… which turned into a multi-swing or ‘super’ divergence… which is playing itself out this morning.  You can note at least a four-swing positive divergence pattern with price and the momentum oscillator beneath it – significant price moves can often arise from a lengthy divergence.

Price is now above all moving averages on this timeframe, hinting that they will serve as support (or at least a low-risk long entry should price test these ‘confluence’ levels soon).  Also, we have an officially confirmed positive change in trend on this short time frame (for what it’s worth).

Let’s rise to the 30 minute chart.

Next, we’ll step up to the 30-minute chart:

This takes into account part of last week’s action and shows the initial surge and clean retracement (which almost looks like it’s forming an extended bull flag or possible “A to B = C to D” Measured Move pattern.  It would be fascinating if we achieved that target, but we’ll have to see.  Look back to last week’s multi-swing positive momentum divergence and the resolution that occurred – I’m not saying that will happen again, but it’s an interesting observation.

Oh, and is the $118 level ‘magic’ support?  Possibly, but it also corresponds with the 61.8% Fibonacci retracement of the Thursday low to the Friday (opening) high which rests at $118.48 (roughly where price has supported).

What’s the expectation?  Odds seem to favor upside action and a potential positive reversal to the upside in these short-time periods, and a move beneath $118 would clearly invalidate this view (potential to place stops).

Keep in mind that breaking news can change the structure, so be careful to trade exclusively off technicals (or fundamentals for that matter) or to use excessive leverage right now or large position sizing in this environment where rapid swings can emerge seemingly out of no where.

Still, risk control and capital preservation are the goals of the day.

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