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S&P 500 Momentum Is Bearish

05/17/11 07:29:14 AM
by Mike Carr, CMT

Multiple time frame analysis points to lower stock prices.

Security:   SPY
Position:   Sell

Monthly charts, like the one of the Standard & Poor's 500 that we see in Figure 1, can offer powerful symbols. Bollinger bands are combined with the rate of change (ROC) momentum indicator. ROC became overbought; it rose above the upper band in late 2004. The market advance stalled at that point. The next buy signal from that indicator occurred at the end of March 2009, a timely buy shown when the ROC crossed above the lower Bollinger band. The sell signal will be confirmed at the end of May, if ROC remains below the upper band.

FIGURE 1: S&P 500, MONTHLY. ROC has fallen below the upper Bollinger band, a possible signal that the overbought condition is nearing an end.
Graphic provided by: Trade Navigator.
Long-term trends can be identified with monthly charts. Shorter-term time frames allow traders to confirm the signals and take timely action. For the S&P 500, the daily picture, shown in Figure 2, can also be considered bearish.

FIGURE 2: S&P 500, DAILY. The S&P 500 stalled at resistance and displays a momentum divergence.
Graphic provided by: Trade Navigator.
In this chart, ROC failed to confirm the most recent high in the S&P 500. The February high near 1338 proved to be resistance and prices were again struggling at that level.

Technical analysis requires the analyst to develop a market opinion based upon the preponderance of the evidence. Stocks right now offer several bearish indicators, and that is worth noting in any analysis. If we see follow-through to the downside, we are likely to face a significant decline. At this point, traders should consider avoiding new long positions until we break decisively higher. Shorts may be early, but they are more likely to see long-term rewards.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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