by Chart School - August 15th, 2009 9:20 pm
Courtesy of Corey at Afraid to Trade
I wanted to show two quick charts of the internal S&P 500, highlighting a “Rounded Arc” formation along with a view of a potentially significant negative Breadth divergence at the highs. Let’s take a look.
First, the 30-min chart with 3/10 Oscillator “Momentum” Divergences and Arc Pattern:
You can almost draw a full arc on the 3/10 Oscillator peaks as well, which forecast an arc prior to it happening.
Now, the oscillator is making new momentum lows, and the peaks in the oscillator are forming lower highs as price formed higher highs – that’s the sign of a classic non-confirmation which can be a bearish signal.
The fact that price is forming a clean ‘arc’ pattern also has bearish implications, given that arcs represent a gentle transfer from demand (buyers) to supply (sellers).
The expectation is that the arc formation has already, or will peak soon, and price will follow the arc now to the downside.
Let’s take a deeper look at market internals to see if we’re getting a similar picture.
Here is a 30-min chart of internal “Breadth”:
The lower pane ‘indicator’ is actually a symbol – $ADD – which stands for “Advance/Decline Difference” (or the difference between NYSE advancing stocks minus NYSE Declining stocks) drawn as a line chart.
We see that breadth made a new high near July 15th with price at 930, though price has peaked at 1,018, breath has formed a series of lower peaks, which also lock in a non-confirmation or divergence just like the momentum oscillator.
The breadth divergence is more ‘important’ or significant than the momentum oscillator, because the momentum oscillator is price-based.
The implication is quite bearish, given that the S&P 500 is hovering beneath critical resistance at the 1,007 level as well as the 38.2% major Fibonacci level at 1,014.
Should price break above 1,020 solidly, it would disconfirm (overrule) these divergences, but until that happens – and it could – we have to assume resistance will hold and that the divergences will play out as they have so many times in the past. This concept of ‘non-confirmation’ dates back to Dow Theory!