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SPX Update: Studying the Divergences in the Trannies and MACD

SPX finally broke the 2011 highs, which is a huge monkey off my back, since I’ve been insisting that it would ever since the Dow broke its 2011 highs back on Feb. 7.  Now we’ll see if SPX has any interest in the double Fib zone of 1376-1378, and in making a turn soon.

As I’ve discussed previously, the Dow Transportation Average has been diverging from the Industrials since then — and now, with the Monday’s action, the SPX is diverging as well.  I took a look at the two most recent times the Trannies have made a solid turn ahead of SPX, and both instances eventually led to a correction in SPX.  Averaging these two recent instances, the SPX target for a turn is roughly 1375 — which lines up nicely with the wave counts.  Chart below.

The SPX chart is next, though there’s not much to add over the past few weeks.  Yesterday’s decline bounced right at the trendline and rocketed up over the 2011 high.  If my count’s correct, this is the zone where a turn becomes likely.  

Of anecdotal note, the bears seem to have given up all hope of a turn ever happening, and the bulls are amazingly complacent now in their “buy the dips” thinking.  This psychology is perfectly in line with the end of a fifth wave. 

The next chart takes a look at the massive MACD divergence currently present, and should give pause to those bulls who believe we’ve kicked off a never-ending rally to the moon.  The MACD and other market internals are giving fair warning that this rally isn’t as strong as it looks.  Note how differently MACD behaved coming off the 2009 and 2010 bottoms.

I also want to whip out the Bullish Percent Index INDU chart one more time (“Scuse me while I whip this out…” — sorry, a little Blazing Saddles humor there), to show that the market hasn’t been able to get away with these readings for long in the past.  It usually rallies a bit after hitting this level, and that’s now happened.  Could go for a little bit longer, but it can’t go on “forever,” which seems to be what everyone’s expecting at this point.

In conclusion, the charts are again aligned for a potential turn.  But if you’re a bear, please don’t front-run — as I’ve been warning for a long time now.  Hopefully, if you’ve heeded these warnings, you haven’t lost a cent on the short side since the 5 points lost when I suggested shorting at 1328 with stops at 1333. 

Not sure if you’ve wagered anything on the long side, but since SPX 1347, I’ve been pretty strong on the idea that SPX would break the 2011 highs — however, it certainly hasn’t been the easiest market since then, and I can’t say I’d blame you if you didn’t hold longs through all the up and down whipsaw action.

I would also say if you’re a bear who’s survived or made a profit in this market, then pat yourself on the back.  This has been a very rough run for bears, with a lot of false signals being generated across the board in most every form of analysis.  This has been one of the toughest markets I can remember, because the signals have been at complete cross-currents with the price action.  The signals have not confirmed strength, yet the rally has continued. 

This is the type of move that can bankrupt an overly-eager bear, and I do hope that my consistent warnings of watching and waiting on the trend lines have, if nothing else, at least saved swing-trading bears from jumping in too soon.  Nimble bears have been able to make a few bucks — but in this market it hasn’t been easy, or even advisable, to hold a position for long.

The big ECB LTRO announcement comes this Wednesday, and it’s difficult to predict how that will impact this market without knowing the details behind it.  This is not a “news” event as much as a liquidity event — and liquidity drives the market. 

It seems safe to assume that a fair amount of front-running by the bulls has occurred in advance of this announcement.  It also seems safe to assume that the looming threat of this pending liquidity flood has kept the sellers very subdued — as a result, the announcement has the potential to be a game changer.  The preferred wave count is strongly suggesting a turn soon — so the ECB announcement may turn into a “sell the news” event.  Based on all the technicals, I feel (as confidently as one can in this bizarro market) that it will.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

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