More Topping Signals

January 30, 2013 (2:15 pm)

The FOMC minutes will be released imminently. In the meantime, let’s review our expectations. Fed announcement’s have a canny ability to change market trends. A large number of trend changes have occurred precisely on days when the FOMC minutes were released. It also makes for much higher than average volatility. Remember, the process of forming a top (as well as a bottom) takes time (that’s why it’s called a process and not a point). If the market closes in the red today, it may be a sign of an upcoming trend change.

Long-Term SPY Rising Wedge. First, let’s take a look at an enormous SPY rising wedge. The upper trend line has been nearly a decade in the making. With the new highs formed today, we’re clearly testing that upper trend line. Since the trend has been so long in the making, it’ll likely represent fairly significant resistance.

SPY Long-Term Wedge

Clearer View of Near-Term Wedge. The chart below is a closer view at the near-term implications of the larger rising wedge. You can see more clearly that the SPY is just now reaching that important trend line. Meanwhile, along with the higher highs the SPY has recently been making, the RSI and volume have been declining. That’s a bearish sign that the upward momentum is deteriorating.

SPY Wedge

MACD Divergence. We’ve recently begun analyzing the implications of the MACD on the recent price action. But when we take a step back and look at a longer-term view, it’s clear that the negative divergence, with prices rising as MACD declines, is an important signal that we need to keep an eye on. In early 2010, the SPY made a higher high that was not confirmed with a higher MACD. The shares proceeded to plummet in the ensuing weeks. Similarly, in late Spring 2011, higher highs on the SPY were not confirmed with higher highs on MACD. This also led to a precipitous drop in just weeks. We’re currently seeing a second higher high on the SPY that, for the second time, is not being confirmed by a higher MACD.

SPY Divergence

SPY Support. We included a chart below, which illustrates likely support levels for the SPY. The first major support sits around the $146 level, which represented the previous highs in 2012. The next area of support rests on both sides of the gap (“GAP”) created after the resolution of the fiscal cliff. Finally, the SPY should see major support just below the $140 level, which has been a significant level of support for many months. Just something to keep in mind…

SPY Support

QQQ Head & Shoulders. Lastly, we wanted to reiterate our concern around a potential head and shoulders top on the QQQ. Unless it’s able to quickly and decisively take out the $68 price level, this will remain a major concern for the intermediate term.

QQQ Head & Shoulders