There are a lot of people worrying about a major market top, and there are just as many (mostly in the fundamental camp) confident that we're on the verge of another major up leg. We can see the logic of both positions, so how can we sort it out? While we need to be aware of the fundamentals affecting the market, we are technical analysts and we need to keep our focus in that area, believing that will give us a solid foundation for our decision-making.
At a very basic level the technicals are negative. Two of our favorite indicators, the Price Momentum Oscillator (PMO) and On-Balance Volume (OBV) have formed negative divergences versus price. A negative divergence is when price makes a top above a top and the indicators make a top below a top. The PMO is the result of a rate-of-change calculation, so it is not so easy to immediately visualize what it means, but it is basically telling us that price is losing internal strength.
OBV is a lot simpler. It is cumulative volume, calculated by adding or subtracting daily volume based upon whether price closes up or down. It is easy to understand that, while price made new highs, volume was not confirming the price move.
CONCLUSION: The negative divergences are "non-confirmations" of the new price highs, and they are telling us that the technicals do not justify the recent price advance. We are seeing similar problems on other indicators, so it is a warning that some kind of corrective action is likely, at least in the short term. It doesn't tell us if the next move will be a major up or down move, but we have a clue in which direction the next move is likely go.
Click here to register in advance for the recurring free DecisionPoint Trading Room! Recordings are available!
Technical Analysis is a windsock, not a crystal ball.
Helpful DecisionPoint Links:
DecisionPoint is not a registered investment advisor. Investment and trading decisions are solely your responsibility. DecisionPoint newsletters, blogs or website materials should NOT be interpreted as a recommendation or solicitation to buy or sell any security or to take any specific action.