Weekly and Daily Analysis of the SPY (by bouje)

By -

Yesterday I put up a post about the Ten-Year and while that was well received I know that most people here don't really trade Fixed Income so I thought that I would do a similar analysis of the S&P but only on a weekly and a daily time frame to show you exactly how divergences work (and also when they don't work).  Up first the weekly:

SPY.weekly.oct.22

As you can see in late 2008 the market made a new low and so too did the MACD but in early 2009 the market bottomed out but the MACD made a higher low.  This is a typical divergence and what you should look for when looking for market trend changes.  Look at the RSI and again you will see a similar divergence at the bottom in 2008/2009.  I also like to extend the current trend-line on the MACD and look for breaks of that trend-line to also confirm the trend-line (which in this example the S&P had a confirmed trend change in April and then broke the MACD trend line around May/June).  Now the larger pick trend will stay bullish until we can first get a bearish cross on the MACD on the weekly and then if we are lucky a confirming divergence (look to the way left of the chart to see an RSI topping divergence). 

 
Now on to the daily picture:

Spy.daily.oct.22

So I think that everyone remembers the H&S that happened over the summer that many bears got trapped on and we can look back and see what exactly happened.  First there had been a trend-line (that cannot be seen) from when the bottom was formed on the MACD.  The MACD actually curled up after the failed breakout and formed another point on that trend-line.  Look at the bearish divergences on the daily chart and then how they didn't play out.  The daily charts have had a ton of daily bearish MACD divergences (particularly in companies like GS) and so I've decided that it is better to look at the weekly as a better indicator of where the intermediate/longer trend lie.  So while the bearish divergence in the daily looks good as can be seen earlier this year with the failed H&S breakout they haven't exactly behaved ideally which is why I'm not willing to say that "This is definitely the top". 

This isn't all bad news for bears because the daily MACD upward trend-line has been broken now since that down move in September which is the first good sign that the rally is coming to an end.  But I think that the real story will unfold when there is a trend change in the weekly and the weekly MACD finally rolls over and forms a bearish cross and (god willing) a bearish divergence. 

Some things to keep in mind about the divergence:

1.  You can anticipate the divergence if you see the weekly start to roll over (for the lower high) and then can go into a daily to determine if there is also a bearish divergence there and look for better entry points there. 

2.  The divergence isn't broken until there is a clear violation of the trend-line. 

3.  This analysis can be used for any time period (I really feel like it works very well for 15m charts for a look into the future of a day or 2.  For example right now the TY has a 15m bullish divergence and until that trend-line is taken out the risk is to the upside in the TY. 

Thanks again Tim for having me and I hope that you guys enjoy the analysis feel free to leave questions, comments, concerns in the comments and I'll try to get back to you.  - – - Jason