A Correction Is Due

As you can see, there is visible negative divergence in the CCI (top) and in the A/D (bottom). It also shows in the SRSI in the slower MA. It would take an immediate, strong extension of the rally beyond 2800 to change the increasingly negative appearance of the chart and the expectation of an imminent reversal.   

SPX hourly chart

The price channel can best be identified by drawing a line across the first three near-term tops of the uptrend, with a parallel at the 2346 low.  From the third top, the trend starts to angle downward and it does not touch the bottom channel line until 2/08.  From that point on, the index has continued to crawl above the channel line without being able to trade below it.  It is fair to assume that when it does (which could be next week), it will start a correction of the entire trend with a rough objective of about 2600.  This is about where it would back-kiss the broken red downtrend line and provide a .382 retracement of the entire uptrend.  As we get closer to that point, we can start refining the analysis to see if this is where we are likely to end the correction. 

After finding support on the bottom channel line, the index moved back above the 50-hr MA and made a new high which was followed by one more retracement to just above the MA.  From there, it embarked on what looks like the final small 5-wave pattern which could complete as early as Tuesday.  To repeat, unless we can get another surge in prices on Tuesday, the odds favor putting an end to the rally on that date. 

The opening gap on Friday morning immediately took SPX to a new high and erased the negative divergence in the oscillators, but it was reinstated by the end of the day.

DJIA, SPX, IWM, NDX (daily)

Last week, IWM was the best performer and the first one to overcome its December 3rd peak which is comparable to 2800 in SPX. Since we have been looking for that index to underperform the others at the end of rallies, what is it telling us? If it’s any consolation for the bears, by the end of the day on Friday, it was well underperforming the DJIA and, to a lesser extent the SPX, while NDX was underperforming them all. Perhaps this is enough underperformance (although far from ideal) to still be meaningful. 

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Analysis of the short-term trend is done on a daily basis with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discusses the course of ...

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