Morning Charts on Momentum Divergence Unwind

Jun 8, 2007: 6:36 AM CST

Attached are swing charts with the 3/10 MACD momentum oscillator. The most recent daily bar on each index turned red following the decline, meaning we have extended 2.5 Average True Range readings from the market peak (near Dow 13,700 and S&P 1,540).

I know I write a lot that “Momentum Proceeds Price” in the form of divergences, but it tends to be true more often than not. Momentum readings definately can form a strong tool for your trading strategy, though they are not the ‘end all’ for a trading strategy alone.

Longer Swing Chart of the Dow:

dow-june-7.jpg

Four month chart of the Dow:

dow-close-june-7.jpg

In both charts, please note the rising price swings and declining peaks in the bottom pane oscillator. This is no coincidence. Buying pressure (strength) began to weaken as the rally continued. It was literally as if the buyers were running out of steam to push prices higher and any sort of news or reason would cause avalanche selling to trigger stops and anxious short trades in an environment with few buyers.

The same is true for the broader S&P 500 index:

spx-june-7.jpg

The price swings and momentum divergence is a bit clearer in the S&P than the Dow because the Dow failed to make clear price swings, but rather it formed a pattern of almost a pure rise with extremely shallow (one day) counter-swings.

As a bonus, here is a Chart of the 10 Year Bond Price (@TY futures). Remember falling bond prices occur because of rising yields, and the bond market tends to lead the stock market in price and anticipation of economic conditions. This is true in terms of intermarket relations, but Kevin at Kevin’s Market Blog recently posted a possible day-trading indicator using indtraday pricing of the 20 year T-bond fund leading the S&P by an hour.  The bond market has been in free-fall since mid-May, signaling plenty of warning of (possible) impending doom.

10y-yield.jpg

The 10 Year Treasury Bond (price) is making new price lows and new momentum lows. It is only 30 points away from a 52-week low set almost exactly this time last year (7/07/06). That price low was 104.00 and we now stand at 104.30. Price is making lower lows and lower highs and the bonds are in a technically confirmed downtrend.

Caution is important and so is your own analysis on the markets and economic conditions.

4 Comments

4 Responses to “Morning Charts on Momentum Divergence Unwind”

  1. Joe Says:

    For whatever it’s worth- we narrowly escaped a sell signal from Navarro’s Three Point Break method with today’s close above 1505 in the S&P 500. From that point we’re still in a confirmed uptrend. I still think we’ll have a volatile week ahead, but do believe the bull has one more run to go this summer before we’ll go into the seasonally week August/September.

    Joe

  2. Corey Says:

    Talk about volatile week! We finished today up over 1% in the major indexes, I’m sure surprising a lot of traders, especially those who jumped in short in the morning.

    People have different ways of defining trend structure but the ‘purist’ definition is a series of higher highs and higher lows. For the trend to change from an objective sense, the market must make a lower low (it has), swing up for a lower high (it has not) and then take out the most recent lower low (not near) and thus we will stay in a confirmed uptrend until this sequence unfolds. Odds favor trend continuation to the upside until the trend officially changes.

    I do think prices will be a bit volatile as well, and there will be plenty of opportunities for the nimble day traders to make quick profits ahead. Usually, the summer seasonality is one of narrowing volatility and range contraction because of lack of participation, but this market environment appears to be a bit different from what’s expected.

    Thanks Joe!

  3. Alex Spiroglou Says:

    Further bond weakness will effect stock market health. Rising rates will kick into growth.
    For the here and now (9th June 2007), 10Y rates of 5.25% is probably the highest we will see
    for at least the next few months.

    Alex Spiroglou
    http://www.CAStrategy.com

  4. Joe Says:

    If you look at shorter time frames, you can see that “high tech” sectors had the biggest run up in the last month. I like to compare the fidelity sector funds. Among them, computer/wireless/telecom sectors were the leaders, whereas energy did not look as good at all. I wonder what this could imply. Yet we’re still headed for the seasonally weak period in a month or so.

    Joe