Ominous Signs in this Market Indicator

The stock market has been on a rip lately. The S&P has risen well above 3000, and currently sits at 3120.5 (^GSPC Chart). But how high will we go without a pullback? More importantly, how big will that pull back be?

Yesterday, while trying to find clues, I put the ‘On Balance Volume’ indicator on my SPY chart. This indicator basically gives you an idea of accumulation and distribution in the market; it tells you, in general, if the market is scooping up shares, or selling shares. I use the OBV from time to time, but have not used it in a while. What I found was scary.

SPY chart as of 11/15/2019

Notice the descending trend on the OBV indicator? More importantly, notice the pullbacks that have happened each time the OBV dropped in relation to the market rip higher?

At the end of last year we had a correction. The markets tanked for a couple months, and finally bottomed out on December 31. Since then the market has climbed to all-time highs setting record after record.

Our first substantial pull back of this year happened right after the May high. This is when the Trump administration basically said a deal with China was currently off the table. The markets did not like the news one bit, and down it went. From there it rallied to new all-time highs in July.

Same story in July – more negative trade news, and the market soon fell. However, the fed started to talk about lowering interest rates, and the market liked that. It soon rallied again in September and met up with the July all-time high. Then, of course, another pullback on… you guessed it… negative trade news. Since the pull back bottom in early October, we have rallied to even higher highs. The market is on a rampage!

But there are ominous technical signs that this is not sustainable without some sort of pull back or correction. Take a look at the chart one more time:

SPY chart as of 11/15/2019

The blue vertical lines are meant to show the market highs in relation to the OBV. The red arrows, of course, are pointing to the highs of the OBV in relation to the blue lines. The blue dashed line on the indicator shows the May OBV high, and the purple dashed line shows the July OBV high.

Notice, each all-time market high comes with a lower OBV high. This is divergence. The On Balance Volume indicator is showing divergence with the overall market.

After the July market high, the market pulled back. The OBV might have predicted this, as it could not reach the May OBV high. Same story for the September rally – the OBV might have predicted that one as well. This time, the September OBV could not reach the July OBV high or the May OBV high. And here we are today. The OBV is right at the September OBV high, but well below the July and May OBV highs.

Quite a tongue twister that last paragraph was. LOL! But you get the idea.

There is one other ominous sign the OBV is giving me. Notice the OBV has been slow to rise during this current rally when compared to the other rallies? That is showing that there is lack of conviction in this move. It seems market players are leary about moving forward on the current trajectory. The other rallies showed steeper OBV rise.

As I always say, this does not guarantee a pull back or correction will happen any day now. There is no “holy grail” of market indicators. The OBV is no exception to that. This is just something I noticed and wanted to share.

This post is my opinion only, and should not be taken as advice. Always do your own research before making any investment decision. Seek professional and licensed advisers if you are unsure.

RSI Divergence on S&P Futures

As soon as I started charting and prepping for tomorrow, I noticed that there is RSI divergence on the daily /ES (S&P E-mini) chart. Not only that, but there is declining volume as well. And it doesn’t end there… we are at all-time highs while all this is happening.

Take a look at this chart I made on Trading View.

Notice how the black line at the top of the chart, and the black line in the RSI section are moving in opposite directions? That’s called divergence. And when there is divergence on a large time frame such as the daily, and when that divergence is happening with a momentum indicator like the RSI (Relative Strength Index), it is definitely worth keeping an eye on.

The RSI is a momentum indicator, so it is showing us the direction of the overall trend which has been climbing for quite some time. But it started to crest a few days ago. Notice how it never reached as high as the crest before it? That’s an ominous sign. And that is the divergence, as the S&P has continued to climb through it all.

Not only that, but notice how long the volume has been declining? This is implying there is relatively no buyers left in this market. This is implying that there might be some exhaustion on the buy side.

Sometimes, but certainly NOT always, divergence tends to predict near term movement. When the divergence on the RSI is to the downside, the stock tends to move down eventually. The opposite happens when there is divergence to the upside on the RSI. However, it does not ALWAYS work out this way.

I just wanted to point this out. It is a big bearish technical indication, and is worth keeping an eye on. We are at all-time highs, which makes it even more important to look at. You have to understand that this market is having a very tough time deciding if it wants to break through to new highs. Yes, we keep making new highs, but we can’t seem to close at new highs – there is a difference.

I will be watching my positions closely tomorrow. Right now I am pretty well balanced with my option positions. I have just a slight positive delta, which I may re-balance to a slightly negative delta depending no the open tomorrow morning.

Good luck to all this week! May we all profit.

SPY MONTHLY CHART LOOKING GRIM

The technicals are mounting in favor of the bears. Looking at the monthly chart for SPY, I noticed yet another double top… and more ominous, divergence with the RSI and volume.

What does the declining volume tell me? It tells me that month over month buyers are becoming harder and harder to find. What does the declining RSI tell me? It tells me that SPY is trying to come down from such overpriced conditions.

Of course, fundamentally, you have QE (quantitative easing) propping up the price. This is creating a condition, in my opinion, that will eventually trap new and novice investors. The newbies are probably buying up stocks, because they see there’s a rally. But the problem is, the rally is so old, and so high in price, that they are bound to get burned when this thing comes crashing down.

Do I think a recession is imminent? No. Do I think a big correction (15 to 20%) will happen? Yes! However, with that said, lowering rates and QE after QE is not necessarily a good thing. That could lead to recession type behavior eventually… it’s called DEBT!! The more debt companies get themselves in, the harder it will be for them to climb out if and when interest rates begin to tick back up.

I am overall a bullish investor, but right now I have a bearish sentiment. The technicals and fundamentals are pointing to a big correction in the works. But that’s ok! Because, after it does correct, I will sweep in and scoop up as much as possible for the next leg up. That’s investing 101 for a bull: buy low, sell high. Right now, it seems investors are buying high and selling high… that’s very dangerous!

Remember: ALWAYS DO YOUR OWN RESEARCH AND CONSULT A PROFESSIONAL IF YOU ARE UNSURE WHAT TO DO.