Both the SPY (S&P 500 Index Tracking ETF) & QQQ (Nasdaq 100 Index Tracking ETF) are poised to print bearish engulfing candlesticks with bearish divergences still forming on the daily time frame. As discussed in last week’s video, the 2015 top in the $SPX was marked by a series of three consecutive divergent highs, each producing a decent but relatively brief correction, with prices immediately going on to print a new higher high while the MACD & RSI continued to print lower highs vs. the new highs in the index.
Fast forward about 1 year and we can see that the $SPX has been repeating that pattern so far, with 2 consecutive divergent highs recently, each resulting in a decent but relatively short-lived correction and the $SPX once again moving to yet another, third consecutive divergent high in a series that forms a much larger divergent high going back to the mid-March reaction highs (4 months vs. the 5.5 month duration of the 2015 divergent high).
SPY daily July 15th
In my book, a divergent high is only ‘confirmed’ once we get a bearish crossover on the MACD as until then, the momentum is to the upside & therefore, those divergences could be taken out should the $SPX continue much higher with very little giveback in the coming days to weeks. Therefore, I will be on the lookout for two things going forward: 1) Downside follow-through to today’s bearish engulfing candles in both the SPY & QQQ in the form of a red close today as well as one or more red closes early next week. 2) Should that occur, I’ll be watching for a bearish crossover on the MACD to confirm these potential divergences on the major US stock indices as that would greatly increase the chances that the next major trend in the market will be to the downside. For now, we’ll just have to wait to see what happens next week.