STOCKS UNDERGO SOME PROFIT-TAKING -- SOME MACD DIVERGENCES TO WATCH

DAILY MACD LINES SHOW NEGATIVE DIVERGENCE... Stocks are undergoing some profit-taking today in a market that looks stretched on the upside.    One of the factors that concerns me is the relatively weak performance by daily MACD lines.    Chart 1 overlays the MACD lines on a daily chart of the S&P 500.  What jumps out the most is the negative divergence by the two MACD lines over the last two months.   While the SPX has rallied to a new high, the MACD lines have remained well below their early December high.   That negative divergence is normally a warning of more selling to come.   In addition, the MACD lines appear to be turning negative.  Weekly MACD lines are also starting to weaken.

WEEKLY MACD LINES WEAKEN...Chart 2 overlays the MACD lines on a weekly chart of the S&P 500.   The MACD lines remain in positive territory.   But their histogram bars are diverging from the rising price action.   Those are the green bars below the price action which measure the difference between the two MACD lines.   The chart shows the histogram bars trading well below their summer high which forms a potential negative divergence from the rising price action (falling red line).   And the bars are starting to weaken a bit.   That could be a warning that upside momentum for stocks is starting to slow.   The top box also shows the 9-week RSI line starting to weaken from overbought territory over 70.

MONTHLY MACD LINES LOOK STRETCHED...Chart 3 apply the same MACD indicator to a monthly chart of the S&P 500.   The lines are still very positive.   The problem there is that they may be too positive.   The monthly histogram bars below the price action are now at the widest in recent history going back at least four decades (see circle).   That simply suggests that the current stock uptrend is very stretched on the upside.   Which is the same message being given by other sentiment indicators that show a very stretched market.   In addition, the 9 month RSI line in the top box is flirting with overbought territory over 70.   The good news in Chart 3 is that the market's long-term trend still looks positive.