Sunday, September 27, 2009

Weekly Stock Market Commentary: Negative Divergence continues

There was no break to the growing negative divergence between indices and supporting technicals; MACD and Stochastics weakened as indices remained tagged to their highs. The S&P failed to mount 1,062 resistance but didn't lose enough to reverse its earlier breakout

The Nasdaq has more juice to its tank having handily cleared declining resistance; it's currently toying with the series of reaction lows from 2008 (a fairly wide band of resistance).

The Nasdaq 100 is lingering in the same resistance zone having lead the charge over the other indices

Russell 2000 has its own woes

Breadth indicators are heavily overextended with supporting technicals either flat-lined (MACD) or getting squeezed by narrowing support/resistance

Others look in prime 'sell' status

On the Zignals blog I took a look (again) at the relationship of the S&P to its key moving averages and concluded further gains were the norm rather than the exception (with buying opportunities tied to the 50-day and 200-day MAs). Unfortunately, the one big exception was the 1987 crash. Should breadth indicator continue to diverge as they did in 2006/07 then the probability of a 1987 crash increases. The best case for bulls would be for markets to beat a hasty retreat and consolidate recent gains; relieving pressure from overly hot breadth indicators.

The question will then be, will bulls have the courage to hold through such a correction?

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, stock charts, watchlist, multi-currency portfolio manager and strategy builder website. Forex data available too.