Wednesday, August 1, 2012

SPX and RUT Updates: Happy FOMC Day!

Before I get into today's discussion, I wanted to clarify my last update regarding monetary policy.  Many readers (understandably) took my discussion of additional printing to be a reference to QE3.  Let me clarify that I would be shocked if the Fed announces QE3 this week.  The market's very close to the highs of the year, and the Fed just extended Operation Twist; so I can't see them announcing QE3 anytime soon.  When I was speculating about the potentials of a new central bank liquidity program coming in the relatively near future, I was referring primarily to Europe.

Tomorrow is FOMC (Federal Open Market Committee) Announcement Day, which of course means we all have to wear something green and hand out little cards shaped like clovers to our friends and family.  Cries of "Happy FOMC Day!" will echo through the halls of our nation's grade schools, as starry-eyed children dream of finding the mythical pot of gold that's rumored to lie at the end of the printing press (don't spoil it for them: childhood is a magical time).  In the evening, the bars will fill with adults who've been lured in to drink the green beer... which, in honor of the ongoing devaluation of our nation's currency, will be sold at the discounted price of only $899 per pitcher.

Or maybe I'm thinking of St. Patrick's Day.  FOMC Announcement Day usually means a whipsaw market.

The market continues to send mixed signals.  Over the weekend, I talked about the up volume to down volume ratio, and how its reading on Friday suggested a higher high still to come.  The market made a new intraday high on Monday, but has traded sideways-down since, and closed in the red on Monday and Tuesday.  This actually damages the bullishness of the prior signal, at least over the short-term.  This is similar to the signals being sent by this indicator before the actual bottom was reached in October of 2011, and thus now suggests that the odds favor a new low coming, beneath the last swing low of 1329.

This recent trading range has reminded me of September 2011 in a number of ways already; so we'll add the above signal to the list of similarities.

The one-minute chart is a complete mess and is also sending mixed signals, and I simply can't interpret it with any value at the moment.  I can see it as a possible ending diagonal c-wave (complete at Tuesday's low and suggestive of an immediate continuation of the rally), or a bearish (short-term, at least) nest of 1's and 2's, but I can't find anything that clearly sorts one possibility from the other.  I'm inclined to favor the ending diagonal, but only slightly.

Whether there are lower prices coming over the very short-term or not, the 15-minute chart says there are still pretty good odds of a trip toward 1400-1410 (or higher).  I would be cautious about front-running any hypothetical turns.

The hourly chart shows that bears have so far at least caused the bulls to pause at the current overhead resistance levels, and there is some additional layered resistance up through 1407.  So far, the correction of Monday and Tuesday looks like a bull flag, which is also suggestive of higher prices.

At least one reader asked why the invalidation level is 1422 instead of 1415, and this is an intelligent question.  The reason I'm using 1422 is to allow a margin of error since I'm considering 1415 as the top of a failed fifth wave, and it's not entirely clear if that's indeed the case.

Readers will note that I've added the text "mega-bear" to the invalidation annotation, and the /a and /b labels behind the (i) and (ii).  This is because some indicators are now beginning to suggest that the current ugly rally may be wave b of a larger flat correction (this would mean a rally back toward, or even a bit above, 1422, and then a reversal back down beneath 1266 before ultimately heading to new highs).  We'll see how it plays out from here; but if the market dictates, then I'll need to illuminate and expand on that potential in a future update.

I've also updated the short-term Russell 2000 (RUT) chart, and added a bit more detail with horizontal support and resistance levels. 

In conclusion, there are reasonably good odds of higher prices still to come over the short term.  Trade safe.



  2. Hi! Im wondering why are you searching for MACD-divergence only. There are much divergences already in RSI and Momentum and CCI. In the past MACD-divergence hasnt had so much importance.

  3. RSI shows no significant short-term divergence, as can be seen in the charts posted.