This is going to be a new indicator for some of you, others will remember it, although we haven't used it in a while, I thought it wold be interesting to look at.
First let me explain it, this is not a MACD price based indicator, it is a 3C divergence based histogram-like indicator. The reason I wanted to look at it is because the longer a divergence generally lasts, the bigger the divergence is and the more impact it will have, I wanted to see what we are dealing with here because as you know when I first proposed the theory of "1 more bounce"-the last bounce, I had shown you several volatility measurements which showed market volatility from February when the uptrend was still intact through the March/April area when I showed you the change in volatility. What we saw was at least twice as much volatility in the market recently compared to February, thus the theory was the swings would be wild, much more volatile. We also looked at amplitude of the swings and what I came up with was that a final bounce would be one of the strongest we have seen, I even said it would likely be so strong it would make you question your conviction to our big picture market analysis (bearish). With short interest so high as well as the ratio between puts and calls, sentiment is so overwhelmingly bearish, it just makes sense we would see a really wild final bounce, but it would also take some time to accumulate enough of a position to support such a move and make it worthwhile. The idea from Wall Street's perspective isn't any different from ours, short term long positions for the bounce that are sold in to strength and then shorting in to strength before a reversal-more or less the same thing I and many of you are doing-building the long term short positions and running some speculative short term long trades for a bounce.
Lets use a 15 min 3C SPY chart as an example and then I'll make the price chart clean so you can view it easier.
This is roughly March-present, the 3C negative divergences register on the red histogram-like indicator as deep crests, accumulation periods for bounces register as shallower troughs, the stronger the divergence in 3C, the shallower the trough, the stronger the negative divergence the deeper the crest. I have put yellow boxes representing distribution areas and a few arrows in red on price to show the negative divergences. The white arrows show 3C positive divergences and the white box defines where they are and how strong. The interesting thing about this chart is looking to the far right and seeing how shallow the current trough is, shallower than anything we've seen thus far which would make sense with my theory that the last bounce would be the most volatile.
Here's the same 15 min SPY chart, yellow arrows representing 3C distribution areas that line up pretty well with reversals to the downside and white arrows for accumulation periods, again, the shallower the trough, the stronger the 3C signal. Again, look to the right and note not only the trend, but how shallow the trough is.
This would suggest monster bounce and would explain why the 3C divergence has been so long in the making, the divergence can be seen as the red indicator moves to a more shallow trough.
Here's an hourly SPY chart, note the increasing distribution in to 2012 and the shallowest trough at the October lows where we knew there was at least 2 months of accumulation, we expected a new low and a strong rally before the October low was made, the deeper the red, the more distribution as they sell in to strength.
Here's the DIA 15 min, again note how shallow we are right now.
Longer term DIA 15 min showing the October low to the far left and increasing distribution in to price strength.
The DIA daily, the 2011/2012 depth doesn't look as bad as the 2007 area, I'll show you why in a minute. Note the 2009 accumulation at the bottom and remember, this is based on 3C, not price like MACD.
The QQQ
15 min, again note the trough at the right.
On a daily basis
Finally the SPY daily with no annotations so you can see it clearly.
Like the DIA this chart would suggest that there's less distribution at the 2012 area than the 2000 and 2007 tops, this is pretty easy to explain...
This is the SPX weekly chart
Note volume increasing as it should in a bull market rally (green), now look at volume falling off since the 2009 rally. The readings in 3C are not as deep on the daily charts now simply because there's a lot less volume/less investors in the market now.
These charts would suggest we are still in for one monster bounce.
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