Monday, January 31, 2011

Quick Macro Analysis of the SPY

 This is a 60 min chart with Linear Regression applied to price in blue. Note the strength of the trend early on trading in the top portion of the channel, there's a transition that takes place as it begins to trade in the bottom half of the channel and if you look at volume you can see the transition. Any healthy uptrend should be accompanied by expanding volume, instead we see contracting volume in the first half of the trend. When volume does expand, price is trading in the lower half of the channel and we are seeing some large spikes of red volume. Furthermore, MACD (I use long settings) consistently has deteriorated throughout the trend which makes sense considering the breadth post I recently published. Now we have a channel burst and price has broken below the linear regression channel.  Conventional technical analysis would be short the SPY right in here on a chart like this, but we have to be careful as we have seen time and time again, the precepts of conventional technical analysis are often manipulated as Wall Street knows what traders are all thinking and how that translates into herd mentality. The obvious play from Wall Street's perspective is to rally price back above the channel or at least into it and knock out any short positions that have been established against the SPY/Market. However it doesn't stop there either. We have huge fundamental occurrences that may be pushing this market beyond the control of Wall Street and the Fed. This may be an opportunity, but you must be cautious about it until we see a lower low and a more established break of the trend. Resistance as we are seeing today at the channel, after a break, is quite a common occurrence.

 Here's the daily SPY 3C chart, we can see not only a bigger negative divergence from November through the present, but a more recent negative divergence here in January. If you look close, there's also a positive relative divergence, although small, at the end of November, we'll see that in greater detail on the shorter charts that are confirming this one.


 Here's the "Shorter charts", this is a 60 minute and now the positive divergence in late November becomes very clear and it also shows the extent of the divergence which is fairly large. Distribution appears to have begun on this accumulative leg up around late December and has followed into January. This is the accumulative/Distributive cycle we see in leg up trades and other cycles both long and short. There's accumulation, a run up of prices and then a process of distributing those shares. It runs very much like the 4 stages: 1 accumulation, 2 mark-up, 3 distribution/top, 4 decline. These trends play out on a macro and micro basis-this is the fractal nature of the market. Currently in the red box we have a 60 min leading negative divergence which is more serious then a relative divergence. These divergences tend to lead price down with them.

The 10 min. chart shows a small positive relative divergence and then the negative divergence that led to our down day early on Friday. We can see the positive divergence late Friday as I showed you in earlier posts, the green arrow shows confirmation of the price trend on the 10-min chart, but as we have already seen, there is a negative divergence on the 1 minute chart (from the last market update) . That divergence has not made t to the 5 min chart so there's no reason we' expect to see it on the 10 min chart. If the 1 min negative divergence keeps up, t should migrate to the 5, 10 minute and possibly beyond. If that becomes reality, then we have a stronger basis to believe this break may be something more serious and we may not see the typical manipulation of common technical patterns like the break of the L.N. Channel.

Either way, even if there is manipulation of the channel break and we see upside, it's likely that it would be a false upside breakout to drive out shorts and capture longs before breaking down once again-much like we saw in the QQQQ's ascending wedge last week.

In any case, the technical picture is deteriorating. Whether the Fed steps up or whether world events take a more prominent role remains to be seen. Just remember that tops are volatile. Any trades you enter should take that into consideration when assessing your risk management.

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