MARKET CONTINUES TO FALL ON RISING VOLUME -- HOW TO SPOT NEGATIVE DIVERGENCE WITH OVERLAY CHARTS

HEAVIER TRADING ON DOWN DAYS ... One of the market's problems is the fact that the volume pattern has turned negative. The previous week's upside breakout to new highs by the S&P 500 took place on light volume. Last week's downturn came on rising volume. That's not good. That negative volume pattern has carried into this week. Yesterday's price bounce came on very low volume. Today's drop in price came on heavier volume. That shows that sellers are being more aggressive than buyers and is a recipe for lower prices. Today's drop has placed the S&P 500 SPDR (SPY) in danger of breaking a two-month support line and its 50-day moving average. If and when they're broken, the next test of support will come at the late February low at 118.58. The green bars along the bottom of the chart are the MACD histogram. The histogram plots the difference between the two MACD lines. A move over the zero line is bullish; under the zero line is bearish. You can see that the histogram is in the most negative territory in two months. It's another way of looking at a valuable market indicator. Right now it points to lower prices.

Chart 1


ANOTHER WAY TO SPOT DIVERGENCES... A negative divergence exists when prices continue to rise but a technical indicator doesn't. Chart 2 shows a more creative way to look for market divergences. In this chart, I've simply overlayed the MACD lines (and the histogram) right over the S&P 500 daily price bars. The first thing that jumps off the chart is the fact that the last peak in the MACD lines fell well short of their November peak -- even as prices reached new highs (see arrows). That makes for a weak price breakout. That negative divergence was followed this week by a negative crossing in the two MACD lines. The green bars are the same MACD histogram that I showed in Chart 1. [The histogram plots the difference between the two MACD lines]. There's an even earlier divergence there. Notice that the March peak in the histogram didn't confirm the peak in the MACD lines (see trendline). That's because the MACD histogram usually turns before the MACD lines. In other words, the histogram is a leading indicator of the MACD lines. There's another visual trick that I use when overlaying indicators right on the price bars. As a rule, it's bullish when the indicator is above the price bars (like in November). It's bearish when the indicator is below the price bars (since late December). Overlaying technical indicators right on the price bars adds a valuable dimension to chart analysis.

Chart 2

Members Only
 Previous Article Next Article