Wednesday, June 17, 2009

Key Price Levels: June 17, 2009

The much anticipated sell off is upon us, and while 2 consecutive down days must have the perma-bulls breaking out in a sweat, very little has happened to price to suggest that it is going to get ugly out there. In other words, no support levels have been broken - yet!

Please review the methodology and the significance of the key price levels by clicking on this link.

A weekly chart of the S&P Depository Receipts (symbol: SPY) is shown in figure 1. Prices are retreating from the down sloping resistance line, and they are likely to find support at 90.48 or a down sloping 40 week moving average at 89. This is our first level of support; I would be concerned if this gave way easily. Nonetheless, the real test for the SPY is at 86.78. This is the level that has to hold or the March, 2009 lows will likely be revisited.

Figure 1. SPY/ weekly

A weekly chart of the Diamond Trusts (symbol: DIA) is shown in figure 2. Resistance is at 90; look for a retest of support at 82.64. There are a lot of reasons to suspect a bounce here - several key pivot points and a positive divergence bar. If this level doesn't hold, then it is watch out below!!

Figure 2. DIA/ weekly

Figure 3 is a weekly chart of the Power Shares QQQ Trust (symbol: QQQQ). As mentioned previously, I am not a big fan of an angular breakout, which is a breakout above an up sloping upper channel trend line. This is the price bar identified with the red arrows. The QQQQ has been leading the rally having clawed its way back into the down trend channel. Resistance remains at 36.15; support appears to be the rising lower channel line, which is coming in at 33 for now.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). Initial support for IWM is at 50.13 and for all intensive purposes the "all important" $50 level. The most important level that needs to hold is at 47.58. If this level is taken out, then there is a good chance of revisiting the March, 2009 lows.

Figure 4. IWM/ weekly

Lastly, I want to point out the negative divergence bar forming between price and an oscillator used to measure price momentum. See figure 5 a weekly chart of the SPY, and these are the price bars with pink markers. For those interested, the oscillator I use is called value chart, but it is no different or better than any other tool out there such as stochastic or RSI. I use value chart because I can write computer programs with it. The negative divergence bar is also showing up on charts of DIA, QQQQ and IWM.

Figure 5. SPY/ weekly

What is the significance of a negative divergence bar? First, it signifies slowing upside momentum, and we know this is happening, so it is good to see a negative divergence bar. I think many traders believe that negative divergence bars will signify a market top, but the reality is that negative divergences are part of a market top, but they don't always mean a market top. My research shows that the highs and lows of a negative divergence bar will serve as a range for prices, and it is a break over the highs or a break below the lows of the negative divergence bar that will eventually determine the price direction.

A long, long time ago when I use to write for, I defined the "this time is different" scenario. What the "this time is different" scenario meant was that prices went higher than anyone thought was possible. It looked like a top, and it should have been a top but whoops, prices just kept on going because "this time was different". As mentioned above, negative divergence bars are often part of market tops, and a break above such a price bar would lead to that acceleration of prices higher and make people say, "this time is different". I suspect breaks above negative divergence bars are really short covering as traders, who are positioned for a market top, must cover their underwater positions.

So how can we use this information? A break above the highs of the negative divergence bar likely means higher prices. A break below is a break below and lower prices.


dacian said...

Hi Guy,

Thanks for this excelent post.

"the highs and lows of a negative divergence bar will serve as a range for prices"

For the sake of argument, can you give us the exact price range for the "divergence bar"? And what do you mean by "a break over the highs or a break below the lows"? Is it daily close above/below that divergence bar range?


Guy M. Lerner said...

The highs and lows would be the highs and lows of a weekly price bar; if we don't print a negative divergence bar because of higher prices I will let you know

We are talking about weekly closes above the high or below the low.

Like all things in the market nothing is iron clad, but if we get a close above this week's high than we can say "that this time is different"; more than likely we go higher and I believe the higher is due to short covering.

I will follow up as we go along

dacian said...


"f we get a close above this week's high than we can say "that this time is different"; more than likely we go higher and I believe the higher is due to short covering."

Ok, I got that. We can see on your chart back in 2007 that there were several divergence bars followed by shorts covering, but basically a few points higher we printed the top.

And thanks for the follow up on this, I'm sure it's important.