Safehaven | Are You Watching this Negative Divergence?

October 19, 2009

Are You Watching this Negative Divergence?
by Marty Chenard

It was just a little over 1 year ago, October 3rd of 2008, when the SPY gapped down sharply. That gapped remained unclosed until last Thursday.

On Friday, the SPY had pulled back slightly and it closed at 108.89.

What does this all mean?

It means that the 109.68 level is now a major resistance point. Keep an eye on what happens here, because the SPY will need to move past 109.68 to continue its rally. This is a critical test level to watch in the next few days.

Oh yes, there is one more thing you should watch ... see today's second chart ...

What is the other thing to watch?

The SPY's Relative Strength. In the chart below, we plotted our C-RSI for a 30 day period. The C-RSI is not mystical, it is simply the standard RSI indicator minus 50 so that zero becomes the signal line. (You can't find the C-RSI any place else, as this is just something we do to make the RSI easier to read and interpret.)

So, here is what is going on: The C-RSI is still positive so that is a good thing. However, as the SPY moved up to test the 109.68 level, the Relative Strength dropped. In other words, the SPY made it up to the test level, but with less strength. In technical analysis terms, it is referred to as a "negative divergence".

Negative divergences are warning signs. In this case, a continuation for the SPY to move up while strength continues to decrease would end in an unsustainable condition.

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Marty Chenard
StockTiming.com
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