Saturday, October 1, 2011

MACD negative on monthly S&P 500

I dont always keep track of monthly closes...or monthly charts for that matter...but times like these when nobody knows if we are cheap or expensive, oversold or just gettin warmed up...I like the perspective.

I also like simplicity when it comes to monthly charts...finally...the close is really just another trade...its not different at the end of the month than at the beginning of the next...but different people place different weight on the reality its just another trade that just got executed at 3:59:59:59...and so on...BUT since many people believe the close is important...I use it in many of my analyses.

I also apply my favorite moving average (which also happens to be Alexander Elder's favorite...but it was my favorite long before I read his book)...the lucky 13 period EMA.

I like 13 because its a taboo unlucky number but also, its a fibonacci number...and it's a short enough period that it tells you fairly quickly that a trend is getting going, finding support, or switching to the other side.

The other indicator is simply MACD.

Here's what happens to the good ole S&P 500 as of this month's close (also a quarter close). We closed for the 2nd month well below the 13 what...well MACD historgram went negative...

Over the last 20 years...there are very few occasions that these conditions have been in place (closing under the 13 EMA and MACD histogram going/being negative)...but whenever it did happen it spelled bad news. Just as the opposite usually spelled good news.

If the index was above the 13 EMA and MACD histogram went negative it was usually a sign that the rally was having a retest and that was a buying opportunity.

However, if the trend is compromised by 2 closes under the 13 EMA...and momentum has also been slowing to the point of a negative histogram being in place...then this could spell major disaster.

In late 1999 MACD went negative and stayed negative as the index made less and less progress to the upside. When the index closed under the EMA...bye bye good times. The index didn't see the topside of the EMA untl May of 2003.

In December of 2007 MACD went negative...the index closed the year above the EMA but January 2008 was a bad month to say the least and it pushed the index under the 13 EMA...the Index wasn't going to see the topside of that EMA until July of 2009.

Well here we are we have 2 closes under the EMA this month actually tested the EMA from below and failed miserably...closing near the lows of the month and forcing the MACD into negative territory.

From a candle perspective, these last 2 months look almost exactly like January and February of 2008.

That being said...after those bad months a relief rally ensued and the EMA was we may go to 1233 in the near future...but that's a great short-able number now.

In any case, I believe that we will test last year's lows around 1000 on the S&P 500...I am also thinking that it is likely that we will go beyond that and test the March 09 lows.

That will not be pretty for the world...I am hoping that doesn't occur. Either way...ugly times ahead...unless you are short of course.