Sunday, May 06, 2012

Technical Picture - Short Term Correction

From the weekly SPX chart above we note that the RSI usually signals negative divergence to higher prices and positive divergence to lower prices ahead of a major trend change or significant correction.  The exception was the flash crash of 2010.  So far this year, we have no RSI divergence signal, so the assumption is that we will make higher highs in the near term.

The daily SPX chart below did signal negative RSI divergence to higher prices and the current price action shows that we have been working that off through short-term corrective price action.  The mathematical Fibonacci levels in play are extension long with a target of 1454 (23.6% FE). The anchor is October 2011 high.  We anticipate that the ambush zone will hold as support and will be followed by eventual new highs.  If new highs signal negative RSI divergence on the weekly chart, we will anticipate that a larger correction will follow and lead us back to our longer term trendline on the weekly timeframe.

As depicted on the chart below, the DOW made a minor new high on May1st, but was unconfirmed by all the other major indices.  Non-confirmation of new highs and lows, usually leads to fast collective moves in the opposite direction.  Keep this chart handy as we note that the QQQQs are correcting at a much faster rate than the broader indices.  If, for example, the DOW fails to confirm lower lows, it would foreshadow a reversal of the short-term downtrend.


Rick said...

Good to see a post from you Jamie. What do you think of that huge move down in oil?

TJ said...

Thx Rick,

I'm looking for CL to find support between here and 92.60 which represents a 50% retracement of the last move on the weekly timeframe. Target if we test support successsfully is $118.50

FP A distancia said...

Jamie, thanks for your enlightning post. My question: on the daylies for the SP, why your fibs for the last leg up are drawn from 1292 to 1493 instead of from 1200 to 1493?...I see you're using the break of the last hight to draw the fibs from it, but I do not fully understand this the usual way to draw fibs?

TJ said...

FP A distancia,


You are right the traditional fibs are drawn from previous low to new highs. We buy when price retraces half way back with an expectation that price will make a full measured move to the 23.6% FE. Once price reaches our profit target, we exit the trade and place fibs from previous low to new high and wait for the next measured move to setup and so on.

If, however, price goes beyond the 23.6% FE target because of a very strong trend, there is no longer an expectation for a traditional fib. retracement. That's when we place our fibs from previous high before the breakout to new high, otherwise, we will miss the move and price will continue higher while we are sidelined.

This later scenario is in play because we moved well beyond our initial 23.6% targets for both the red and green traditional fib retracements.

FP A distancia said...

Thanks a lot for your answer, it's all clear for me now. Thank you for your time from a reader from Spain, you're very nice!

TJ said...

FP A distancia,

You're welcome and thanks for the kind words.

CMT said...

I like your analysis - very thorough.
We had a nice move up from the October 2011 followed by a 38% Fibonacci retracement from the recent highs to near 1290. But with lackluster volume on the recent bounce the question is can the rally be sustained. My thought is no.
CMT Trader

TJ said...

Thanks for the feedback CMT. Your analysis was right on.