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US Equity Market Bigger Picture: Powerful Divergences Continue to Build

As covered in the July 10th market outlook video, the 2015 market top was preceded by a series of 3 consecutive divergent highs, culminating in one large divergent top on May 20th, followed by a 12.% drop into the Aug lows (or actually a 15%+ drop into the Feb '16 lows before that 2015 was taken out). So far, the $SPX has made two divergent highs, each followed by a substantial correction & is currently forming a 3rd, consecutive divergent high, unconfirmed at this point as the MACD needs to make a bearish crossover to put in new lower high below the MACD peak back in March in order to confirm the current potential divergences.

SPY daily July 18th

SPY daily July 18th

While the US stock indices have large, potential negative divergence forming on their most recent highs, the $VIX also has large, potential positive divergence forming on its recent lows. White arrows highlight the surge in the $VIX following each of the previous 3 divergent lows in recent years. Should the $SPX experience even a half-decent pullback soon, that would most likely cause a pop in the $VIX which could help to confirm this divergent low which come in around a key long-term support zone.

$VIX daily July 18th

$VIX daily July 18th

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Jul 18, 2016 12:57pm|Categories: Equity Market Analysis|Tags: , , |5 Comments

5 Comments

  1. dan123 July 18, 2016 1:54 pm at 1:54 pm

    Thanks Randy for the updated charts

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    • rsotc July 18, 2016 2:26 pm at 2:26 pm

      YW Dan. I’ve been combing through a lot of sector & individual stock charts trying to find some new trade ideas, especially some longs in order balance out the long & short trade ideas. Hope to be able to post at least a few new setups this week but won’t force it.

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  2. dan123 July 18, 2016 4:20 pm at 4:20 pm

    Sounds good, take your time because so far you did great and i learned a lot from you. One day this central bank induced rally will come of the tracks and there will be a lot of money to be made to the down side.

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  3. freezer July 18, 2016 4:21 pm at 4:21 pm

    Randy,

    First I appreciate you not pressing for trade ideas when they don’t fulfill reasonable opportunity as you see.

    Question: in your experience how often does new highs or breakouts occur on negative divergences? it seems like I’ve seen quite a few of them this past year.

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    • rsotc July 18, 2016 6:11 pm at 6:11 pm

      I don’t have a number off-hand but like as was pointed out in the chart above, each of those 3 consecutive highs in 2015 were marked with negative divergence & each lead to not only a failure of that new high but a sizable correction from just a few days to maybe a little more than a week after each new high was made. Some new highs are bullish & can lead to a new major leg higher but from my experience, new highs that occur with negative divergence in place, especially on multiple oscillators & indicators, more often than not fail with a move back well below where the breakout occurred.
      Maybe this one in the SPX sticks (although that isn’t my opinion & again, the Nasdaq, Russell, Wilshire, etc.. have not followed suit), maybe not but as a rule, I will typically pass on chasing any breakouts, be it an index, sector, stock, etc.., that occurs on a divergent high.

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