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SPX: Breadth Indicators are Flashing Warnings

In my opinion the blast off ("V" bottom) from the October 15 low should be close to have run its course.

We have SPX at ATH hovering a trend line resistance. If a breakout is achieved with volume we don't have any reference above. Probably the tight trading range of the last few sessions, if the 2030 area is not breached, is suggesting that an attempt to trigger another short squeeze is in the cards. If this is the case we can still go long with a tight stop and wait for a reversal candlestick in order to flip to the short side.

If instead, next Monday price breaches the S 1 = 2030 and the September high does not hold (Failed breakout?) a confirmed pullback would be underway with two potential targets:

  • S 3 = the 20 d ma and gap fill = 1994.65
  • S 4 = 50 d ma = 1974

An orderly pullback which does not breach the 50 dma could be considered a "healthy" outcome that would not endanger the intermediate uptrend, while the loss of the 50 dma will most likely open the door to a test of the 200 dma which today stands at 1923.

SPX Daily Chart
Larger Image

Regardless of the issue if the rally from the October 15 low has unfolded an impulsive or a corrective advance (in my opinion it is more probable the latter) maybe a Triangle could fit in last week corrective mess.

If the Triangle scenario pans out the following thrust would have a measured target at 2060 +/-.

SPX 15-Minute Chart
Larger Image

Although there is still no evidence of an ending pattern, which makes dangerous to anticipate a reversal, breadth indicators are overbought and displaying negative divergences:

  • The McClellan Oscillator has been diverging since the end of October. It is now approaching the zero line while the RSI (5) has crossed the oversold zone. If the zero line is not breached the oversold Oscillator could be in agreement with another up leg of SPX.

NYSE McClellan Oscillator Chart

  • The RSI (14) of the NYSE Summation Index is hovering in overbought territory since the beginning of November while the MACD histogram is displaying negative divergence. Even though it is quite extended above its 10 dma (Signal cross) usually if a sell signal is triggered it can last several weeks:

NYSE Summation Index Daily Chart

  • The weekly Stochastic of the Summation Index has also entered the overbought territory. As mentioned above a bearish cross would most likely open the door to an extended period of malaise:

NYSE Summation Index Weekly Chart

  • NYSE New Highs are diverging:

NYSE New Highs Chart

  • NYSE Adv-Dec Volume since the end of October is also diverging:

NYSE Advance-Decline Volume Chart


Conlcusion:

The "V" bottom rally is likely long in the tooth. In spite of still absence of an observable reversal pattern waning Breadth indicators are a warning for a potential source of danger.

If SPX is approaching at least a short-term top it will be interesting to see how far can the bears push the envelope in a backdrop that has historically a bullish bias.

 

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