|Since March 11, the market has been on a tear. Driven by encouraging corporate earnings reports and some good economic data, the bulls have come out of hiding with a vengeance wearing their party hats. Momentum indicators such as the commodity channel index (CCI) and stochastics are glued into overbought territory on the weekly charts of the S&P 500 and the Standard & Poor's Deposits/Receipts (SPY). |
But amid the popping corks and clinking glasses, there are growing signs that the good times may be coming to an end, at least temporarily.
|As a contrarian indicator, the VIX signals that the market is getting ready to correct with values in the mid to low 20s. Values approaching 50 have historically signaled market bottoms. As Figure 1 shows, both the OEX and VIX portend a change in direction.|
|Figure 1 – Daily charts of S&P100 (OEX) and CBOT Market Volatility Index (VIX) both showing strong bearish divergence with the %D divergence and signal line divergence indicators. Indicators by TradingAlchemy.com|
|Graphic provided by: TradeStation.|
|The weakness with divergences is that because signals are based on momentum indicators (which can remain overbought in uptrends and oversold in downtrends), it is imperative that they be confirmed by trend analysis. This means that a sell signal should not be acted upon until the trendline is significantly broken.|
It is also interesting to note that we have hit the critical 965 level on the S&P 500 index (Figure 2), which is the neckline of the long-term head & shoulders top pattern (see The Critical Head & Shoulders Test - Working Money, 11/12/02). Technicians will be watching the market closely for signs that the resistance level will hold or break.
Figure 2: Weekly chart of the S&P
Another red flag is the number of insiders selling versus buying, especially in the tech sector. According to the Wall Street Journal, most recent insider share transaction figures (week ending May 13) show that insiders sold 815.8 million shares to 27.8 purchased for the week. Insiders also announced plans to sell another 867 million shares in SEC filings. Including both current and planned sales, that's a ratio of more than 60 to 1.
Do the insiders know something we don't?
Blackman, Matt  The Critical Head & Shoulders Test, Working Money: November
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