SEPTEMBER SELLING CONTINUES -- MACD LINES TURN NEGATIVE -- MACD HISTOGRAM GAVE EARLIER SIGNAL OF A WEAK RALLY

S&P GIVES SHORT-TERM SELL SIGNAL ... The market continued its early September slide today. Several of our short-term technical indicators have turned negative. One of them them is the daily MACD (which happens to be one of my favorite indicators). Chart 1 shows the S&P 500 sliding down for a test of initial support at 1290. A downside break of that level would confirm at least a short-term (and possibly an intermediate-term) top. One of the signs of the weakness of the August rally is the inability of the (blue) 50-day average to climb back over its (red) 200-day line. To me, the most important support level on the chart is the early July peak at 1280. Here's the reason why. If the S&P has embarked on a new upleg, it should stay above the 1280 level. That's because previous peaks should act as support on short-term pullbacks. A decisive close below 1280 would raise two possibilities. One is that the market is in a large trading range between its May peak and its June low and is returning to the lower end of the range. A third possibility is that the S&P is forming a "double top" formation (the May and September peaks) and starting a major decline. Even if the latter scenario were correct, the S&P would still have to retest its summer lows first. The 1280 level would also put the S&P in the vicinity of its moving average lines. Which brings us back to the MACD lines. The two lines are shown at the bottom of Chart 1. They bottomed below -10 in June and are peaking at +10 in September. [Those two levels act as support and resistance levels respectively]. They turned negative today. That can be seen more clearly by the blue histogram lines. The histogram fell below zero today. That constitutes a short-term sell signal. Chart 2 shows the histogram bars more closely.

Chart 1

MACD HISTOGRAM GIVES EARLIER SIGNALS ... One of our readers asked if the fact that the MACD histogram didn't expand during the recent rally was a sign of weakness. The answer is yes. Chart 2 applies the MACD histogram bars to the S&P 500 for the last eight months. Remember that MACD buy and sell signals occur when the histogram bars cross above and below the zero line (the histogram bars measure the distance between the two MACD lines). The red circle to the right shows it giving a sell signal today. The histogram gives much earlier warnings however. They do so by spotting market divergences. I've marked three of them in Chart 2. A "negative" divergence occurred in early May (first red circle) when the S&P hit a new high, but the histogram failed to exceed its May peak. A "positive" divergence occurred in mid-June when prices hit a new low but the histogram bars didn't (green circle). The August price advance in the S&P saw two declining histogram peaks which marked a weak rally. In fact, the MACD bars were falling close to zero as the S&P hit a new high on Tuesday. That was an early warning that the market rally was very weak. The histogram bars have now turned negative. Although it's not shown here, volume picked up again today as prices slid. That shows that downside selling is becoming more urgent. As I suggested yesterday, seasonal and technical considerations warrant a more defensive stance at the moment.

Chart 2