We've all been studying charts trying to find any sign of price finally breaking for some sort of a correction. The longer this market rallies without a correction the larger that correction should be. Before digging into the chart below, few points need to be realized in understanding what is underneath this current market:
Leverage is back to LEH levels which can exacerbate selling as margin enhances losses and causes phone calls from brokers.
Bullish ratios have been above historical highs (and bearish below historical lows) for weeks on end now.
Insiders continues to sell at the 100 plus to 1 ratio versus buyers and it's been going on for months now.
Money continues to flow out of domestic equity funds. We are on about 37 weeks with only one minor inflow at year end 2010 (working from memory but think the inflow was less than 1 billion).
The VIX has bottomed and matched the prior lows of the May correction. Note it bottomed two weeks before the SPX topped. There was an interesting read on Zero Hedge about the VIX in some sense not being very cheap. It was based on the fact that realized volatility has been very low (not a lot of volatility when markets just go up and up).
Let's look at the chart of the SPX and see some comparisons to the prior sell off in May 2010 (which seems like an eternity now).
Notice the bearish divergence on the MACD through the entire rise off the Feb low to the April high (lower MACD levels while SPX price was rising). Very similar divergence to the current rally.
Notice how long the slow stochastic stayed overbought in the Feb to April melt up and how it compares to the current melt up.
Orange horizontal lines on the current melt up are the gap fills that need to be filled at some point. There are seven that I count.
Notice in both melt ups how price hung on the upper bollinger band for most of the move. The SPX has not touched the lower bollinger band since 8/25 (almost 5 months ago).
The May high was exactly 135 points above the 200MA on that day. Today's closing price was exactly 135 points above the 200MA today.
Notice the candlestick pattern inside the two orange boxes. Fairly similar price action.
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