Tuesday, July 19, 2016

SPX (S&P 500) 1-Hour Chart Negative Divergence Overbot Bull Flag Ascending Triangle Island Reversal Tight Bands Forecast Big Move

The SPX 1-hour chart has lots going on as the chart patterns and spaghetti of lines indicate. The S&P 500 printed a new all-time closing high at 2166.89 yesterday, 7/18/16, but not a new all-time high. The all-time high is 2169.05 from Friday, 7/15/16. The pink arrows show the standard deviation bands squeezing in tight in this one-hour time frame. A large move is coming likely from 20 to 30 handles or more perhaps today. Tight band squeezes do not predict direction only that a large magnitude move is at hand. Interestingly, the tight bands in June led to some additional lift then collapse in price down to 1990.

The important 200 EMA, a critical level that identifies a near-term bull market from a bear market, is at 2108 with bulls in control over the hours and days ahead. The SPX crossed up through the 200 EMA, which Keystone highlighted at the time. Note the textbook successful back kiss (for bulls) on 7/6/16 and then price took off skyward.

For the bulls, the two-leg bull flag pattern in blue is targeting the 2180-2205 area. There is some art involved in the bull flag projections so the case could be made that the pattern has played out. Price is making new record highs so, by definition, is rising but the neon lines show the potential for an ascending wedge pattern over the last four days if you say the base line is 2167-ish. The vertical side is about 20 handles so if price breaks out higher, the ascending triangle would target 2190-2195. The pattern jives with the bull flag target.

For the bears, price remains on an island above 2158-ish. The S&P 500 gapped higher from 2152-ish to 2158-ish and sits on the island for the last four days. An island reversal pattern would occur if price drops lower to the 2157-2159 level, then, in an instant, prints 2152 and lower falling back down through the gap. If the island reversal does not occur, then price may simply venture lower and fill that gap at 2152-2157.

The red lines show the rise in prices for the last week with negative divergence in the indicators. RSI and stochastics were/are at overbot levels. Price is running out of oomph to move higher but looking for the top the last few days is like waiting for Godot. The negative divergence should create a spankdown.

Stocks are usually bullish moving through the full moon each month which peaks in a few hours. However, the uber low CPC and CPCE put/call ratios indicate excessive complacency and lack of fear and are viewed as far more important than a seasonality factor. The low put/calls forecast a drop in the SPX of about 40 to 120 handles from current levels.

Adding another level of complexity, the ECB rate decision and President Draghi press conference is on Thursday. The central bankers are the market. So if Draghi flaps his dovish wings, stocks go up. If he balks and wants to delay more stimulus, stocks tank. As always, for the last eight years, the central bankers control the market.

What does all this mumbo-jumbo mean? Considering the negative divergence and the low put/calls, the expectation is for stocks to sell off from current levels. The tight bands indicate the flush lower may be fast. The wild card is the ECB on Thursday. If stocks rally today and try to remain buoyant into the ECB meeting, the low put/calls have to extract their pound of flesh so the forecast would remain for a pull back in stocks. Keystone is holding/adding near-term shorts looking for the top in here. These are not your grandfather's markets. The central bankers have destroyed price discovery, market functionality and economic cycles over the last few years. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added 8:55 PM EST: The bulls push the Dow higher for new all-time record highs but the SPX lags. Interestingly, the Dow floats higher into the peak full moon which occurred a couple hours ago. The same analysis holds. The bulls are trying to keep the party going into the ECB meeting Thursday morning since Draghi may provide more dovish talk that would provide further market lift. The upside also has momentum on its side. Note how SPX price today kept teasing the 2159-ish level (the top of the gap) and chooses to remain on the island. Tomorrow may be a very exciting day. The tight standard deviation bands on the 1 and 2-hour charts for SPX, INDU, COMPQ and RUT indicate some big excitement is imminent. Perhaps Draghi may lay an egg on Thursday?

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