Quick Midweek Triple Index Update at the Highs

Oct 27, 2010: 11:07 AM CST

It’s time for a quick mid-week major US Equity Index update.

Let’s do a quick chartbook fly-by of the Dow, NASDAQ, and S&P 500 with a focus on the main levels to watch and current structure.

First, the Dow Jones (so close to new recovery highs):

Believe it or not, the Dow Jones Industrial Average came the closest to making fresh 2010 new ‘recovery’ highs recently, falling only 11 points shy of a new recovery high on October 25th.

S&P 500-specific traders – like I tend to be – may have missed this near-milestone.  As of this writing, it has not occurred, but you can be assured that there are thousands upon thousands of “stop-loss” orders from the bears/short-sellers that will be triggered on a true breach to new highs – should that occur.

We look at trend direction and trend strength, and while current trend direction is unambiguously up, trend strength is clearly down – as witnessed in the overextended price rally that recently formed negative divergences in Momentum, Volume, and Breadth.

See my prior post:

“Smoothed Breadth and Market Internal Divergences:  Dead Air Rally.”

That truth still continues – so it’s worth watching, particularly is the indexes all creep up against massive overhead resistance – namely the 61.8% Fibonacci Levels from the entire bear market and the 2010 highs.

The same commentary is true for the three indexes, only the Dow is in the closest position to new highs.

And specific to the Dow, watch 11,000 for key short-term support – which is the 20 day EMA that so-far (today) has held the low of the session.  These are absolutely worth watching.

Next, the NASDAQ:

Similar comments, in terms of overextended conditions, upper Bollinger Band “riding,” and massive overhead resistance at the 2,500 to 2,525 level.

The 20 day EMA is a larger distance from price – at the 2,425 level – though price recently has been riding an invisible support trendline above the key average.

And finally, the S&P 500:

Under normal circumstances, we would be crying out at all the convergence sell-signals clustering on the chart, including the lengthy, multi-swing negative momentum and volume divergences, reversal candles at the upper Bollinger Band, and overhead pocket of resistance at the 1,200/1,220 level.

But, like the Dow Jones, the S&P 500 has been supporting cleanly off the rising 20 day EMA – a feat which (almost) happened again today at the 1,170 level.

As I’ve been showing both to members and on the blog, the current rally is extraordinarily similar to that of February – April ahead of the devastating decline in May.

See the prior updates:

Unusual Similarities in Structure on Prior and Current Creep-up Rally

“Updating the Similar SPX Arc Pattern You Should Know.”

The question on everyone’s mind now is simply whether chart history will continue to repeat into the future or not.

If it does, now would NOT be the time to be long.

In fact, due to all the glaring chart sell signals, the only suggestion to be long now would be on a clean break to new recovery highs above the respective 2010 peaks in these markets.

While that certainly may happen – yes it might happen – the odds of it happening are low as they stand right now (that may change next week) and the risk is just far too high.

If you’re long and history does repeat, you stand to lose a lot of money on a similar structural and trend breakdown similar to that of May.

And – let’s be honest – it’s just a few percentage points higher to see if this rally continues and shatters resistance – at which time it would be safer to be long – and it’s probably not worth holding on right now in such overextended conditions to see if that happens, when considering the risk of a shock-decline materializing if price does not break resistance.

Not really investment advice, but more a comment on the reward-to-risk characteristics of the market in its current state.  A break to new 2010 highs changes that, but we’re not there yet.

And until then, continue watching these indexes extremely closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

4 Comments

4 Responses to “Quick Midweek Triple Index Update at the Highs”

  1. Matt Says:

    Very interesting. I watched your webinar on momentum divergences and you clearly said it takes more than a momentum diveregnce to take a trade. So I'm wondering what would be the trigger you would take to get short? The Gravestone Doji from two days ago on the S&P certainly shows that sellers are starting to appear. I personally feel like we just haven't seen buyers push “all-in” yet. In the middle of April, we clearly saw a power candles after the slow creep up, which showed that the last of the amatuers had finally bought into the market. It just seems that euphoria is yet to bubble over.

  2. Corey Rosenbloom, CMT Says:

    Good question, Matt!

    I think the April run-up and the current run-up is proof positive that divergences – while absolutely important – are NOT trade trigger signals, but rather an assessment of the strength or weakness of a trend in place. Trendline or EMA breaks of key support levels trigger you into a trade, unless you want to be aggressive.

    The April rally had one last 'death breath' or gasp of air – right which could be considered buyers going 'all in' and that's common to end a power trend, which is why counter-trading is risky.

    Look for a solid breach of the 20 day EMA on all 3 indexes or something similar. Markets also have trendlines you can draw which will eventually break (ie – this rally can continue to new highs theoretically, but it would be absolutely impossible for the markets to sustain this angle of ascent forever).

    So, look for EMA breaks, support breaks, trendline breaks, etc for official triggers.

  3. denali92 Says:

    So far, the April playbook is working – not identically, but very similar, especially if we have a WASH OUT close like Tuesday, April 27th – it probably will not happen, but we keep having a similar structure – just missing the BIG DOWN and UP Range Days that occurred in April.

    THANKS!

  4. CumbucoTrader Says:

    This blog has really helped me incorporate the analysis of divergences into my trading, and I'm seeing good results from it.