The weekly chart below shows several reasons why a decline in SPX should be expected. It is still in the early stages, but unless charts change, it is beginning to happen.
The opportunity is presenting itself for those that want to just "hold" a position for 3-18 weeks without needing to devote a lot of time to its management. Whether to enter immediately or wait for a bounce up to 1040 / 1070 is a choice each one must make. If 1020 is violated lower and sustains, then we have double (triple on qqqq) top and I don't expect to see 1070, just a continuing move down to the other targets. If SPX gets to 1020 and then moves back up, then 1070/80 is possible, and a Head And Shoulders could form. Or, SPX can bounce from here at 1035 and we have a Head And Shoulders with a sloping neckline.
Targets are 1020, 1002, 955, 916, 877, 667, 630. I don't know how far down it will go, my goal right now is 1020, 1002 to start. Basically, if each target breaks lower, then I expect a move to the next lower target. I will refine my targets to more exact numbers as the days and weeks pass forward, based on market action.
Please note that this references a POSITION trade, intended to be held for 3-16 weeks. Therefore, SPX will not go straight down. It will have bounces in between. Position trades must ignore the bounces up UNTIL a trend reversal occurs (when higher highs and higher lows start appearing, along with a break over the downtrend line).
We've all enjoyed this rally, but rallies don't last forever.
First, note the divergence between MACD histogram and prices. I have drawn an upward sloping yellow trendline for prices, and a downward slope for MACD. This is a significant divergence because it is occurring on the weekly charts, not only the daily. When prices go up and another indicator like MACD (or RSI, Stoch, MoneyFlow, OBV, etc) goes down, it is a warning that the trend is in danger.
From January 1, 2006 until today, there have only been 6 moves of MACD below the zero line on the weekly charts for spx, so they don't occur frequently.
But why now? This divergence has been in place since June and prices just keep going up up up. As mentioned, this is still in the early stages, but I have already entered a position at spx 1098 (when spx tested the 1100 the second time and failed). There is still opportunity to enter short, given appropriate risk controls. That means, exiting from the position (whether for a profit or a loss) when the bulls regain control and successfully produce a trend change. This does NOT mean to exit at the first sign of higher prices, as mentioned, trades held in this period must ignore the moves up and down unless a trend change occurs.
I've entered "now" (actually pre-maturely last week) because we have the following:
* Red weekly candle. closing at the low.
* Stoch bearish cross (the 2 lines crossed, and moved under 80)
* The RSI shows a double top, with a marginal break below the double top low
* MACD ready to go negative
* The higher volume on the last week's red candle
* The daily and hourly charts are supporting my early entry here
* I have other charts with lots of confusing lines and other studies, indicators, etc but I'm not going into those details here. Maybe later I'll add another post with details, but I don't have time for that now. I've already spent 8-10 hours on this post (including analysis of the other detailed charts mentioned, not just the simplified high-level weekly chart shown below)
Can this be a false breakdown? Might someone lose money if trying to short and the price goes up? Of course, the answer is yes. Investing always carries risk. My position carries little risk now, because I entered early. However, note that I entered on the SECOND test of the spx. Then, SPX actually did go UP after i entered, threatening to start another rally up to 1120/1200. Because it was a position trade, I ignored this, because I did not see the trend reversal. On March 2, the MACD did cross under 0 and then quickly reversed up. At that time, I was also short and forced to exit the trade with a 5% loss. That loss, however, was offset by gains from other positions. More than offset, because I simply exited my short and reversed long (exiting the long side somewhat too early at 1078 because I thought 1080 marked a double top. I didn't make it to the 1100 high on the position trade, although I did do some short term swings on the way up there. But swing is a different story). July 6 was another "almost cross the 0 line, where i exited with a small profit actually). So, sometimes we need to take a small loss before it becomes a large one, or we must settle for a smaller profit because our target was not reached and the market reversed on us. And the MACD has not actually crossed 0 yet, it is at 3.27 now. Also, the RSI has only marginally violated its prior low of it double top, so it could turn up.
The "yellow lines" on the chart are hand-drawn by me. The other studies are calculated by the computer software. The yellow lines near the volume are just my way of saying "look here".
* ChristopherStockGuy is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. For details, see the post from SATURDAY, AUGUST 15, 2009 titled "Disclaimer".
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