A LOT OF NEGATIVE DIVERGENCES ARE PRESENT AS MARKET WEAKENS -- THAT INCLUDES NYSE BULLISH PERCENT INDEX AND % NYSE STOCKS TRADING ABOVE MOVING AVERAGE LINES -- WEEKLY RSI MAY ALSO BE LEADING SPX LOWER -- POSSIBLE DOWNSIDE TARGETS FOR AN OCTOBER CORRECTION
NYSE BULLISH PERCENT INDEX SHOWS NEGATIVE DIVERGENCE... A number of technical indicators are showing "negative divergence" from stock market indexes. That's normally a warning sign that the underpinnings of a stock market rally are weakening beneath the surface. Let's start with the NYSE Bullish Percent Index ($BPNYA) which plots the percent of NYSE stocks that are in point & figure uptrends. Chart 1 shows the p&f version of that index weakening since mid-year. The last p&f signal was a "sell" which was given during June. [A p&f sell signal is triggered when a falling O column falls below a previous O column]. After rebounding during July and August (rising X column), the index slipped back into a falling O column during September (now at 68%). [On a p&f chart, an X column shows rising prices, while a O column shows falling prices]. The line version of the BPNYA is also issuing a warning signal. The red line in Chart 2 shows the BPNYA forming a pattern of "lower highs" since May. That declining pattern is diverging negatively from the NYSE Composite Index (black line) which hit new highs during August and September. The fact that the slippage is taking place from overbought territory over 70 is an additional caution sign.
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Chart 1
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Chart 2
NYSE PERCENT OF STOCKS ABOVE 50 DAY AVERAGE IS SLIPPING... Another indicator that's starting to slip is the percent of NYSE stocks trading above their 50-day moving average. That's the blue line in Chart 5 which has just slipped below the 60% level. It's not unusual for that line to fall well below the 50% level during market corrections. The last three market downturns this year saw the blue line drop to 42% during April, 22% during June, and 32% during August. The fact that it has dropped 15% since mid-September warns of another market setback. [The percent of NYSE stocks above their 200-day average (below chart) is currently at 62% which is well below its May value of 80%].
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Chart 3
WEEKLY RSI SHOWS S&P 500 DIVERGENCE ... Chart 4 compares the S&P 500 (black bars) to a 14-week RSI (purple) line over the last two years. Two things jump right off the chart. The first is that the RSI has turned down from an overbought reading over 70 for the first time since the start of 2011. The second point is that the RSI shows a pattern of lower highs during July and September which forms a "negative divergence" from the rising S&P 500. Below the chart, you can also see the weekly MACD lines in negative territory and forming their own negative divergence. Those are warning signs that the market is vulnerable to a downside correction.
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Chart 4
POSSIBLE DOWNSIDE TARGETS ... The daily bars in Chart 5 show the S&P 500 slipping below its (blue) 50-day average. It's also in danger of falling below a rising trendline drawn under its June/August intra-day lows. That would signal a likely drop at least to its August intra-day low at 1627 (a drop of 6%). If that doesn't hold, a further drop to its 200-day average (near 1600), or even its June low, wouldn't be out of the question. The weekly bars in Chart 6 show the S&P 500 falling back to its (red) 40-week average twice since its 2011 bottom (red circles). The rising trendline in Chart 6 also shows potential support near the 1560 level which coincides with the June S&P 500 intra-day low (A drop of approximately 10%). While market risk has risen over the short- to intermediate-term (especially during the historically dangerous month of October with a rising VIX Index), the longer range market trend still looks positive. The month of October has witnessed some of the market's worst selloffs. It has also, however, provided some of the best buying opportunities.
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Chart 5
