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Near-term Technical Divergences Remain in SPY

Technical divergences remain on the daily charts. The negative divergences between indicators and the index warn of a matured trend nearing a market top or another consolidation or correction phase. Traders and investors need to monitor for sustained divergences between the market internals and the SPY price trend to evaluate for downside risks or the next sustainable SPY rally. With the many year-ends portfolio window dressing and tax loss strategies, it may be challenging to know if the current trends are near-term fluctuations or actual real buying or selling.


Since the prevailing trend for SPY is an uptrend, the market actions over the past two months are another consolidation/correction phase rather than a top. Nonetheless, the transition from a bullish rising uptrend toward a sideways trading range market over the past two months hints at another near-term battle between the SPY bulls and the bears.


Although the intermediate-to-long term trends remain bullish, the divergences in some of the momentum and overbought/oversold technical indicators suggest buyers are not fully participating in the recent market rally. For example, the MACD price momentum indicator did not confirm the recent Nov 2021 record highs. The RSI overbought indicator also diverged from the SPY price trend. RSI is at 55.13 or near its neutral zone compared to SPY, which nears its Nov/Dec 2021 highs. The +DI, -DI, and ADX trends are whipping within a trading range and need further technical work to confirm a sustainable uptrend.

The negative divergences between price and indicators often signal weakening buying pressure or strengthening selling pressure. It hints at limited upside potential or exhaustion of the uptrend, at least on a near-term basis.

In prior bearish divergences between price and technical indicators, it has led to consolidations or corrections of around 5-6%. The ability of SPY to rally back above its 50-day ma (459.55) and the technical indicators reversing their bearish divergence conditions have led to the resumption of the primary uptrend.


However, previous bearish divergences and a break of the 50-day moving average would be a warning of another test of pivotal support at 447-451 (Nov/Dec 2021 higher lows). Below 457-451 warns of a retest of 432 (200-day ma), and below this to 425-427 (Sep/Oct 2021 reaction lows).

Despite the volatile conditions and negative divergences over the past two (2) months, the gap-up on 12/21/21 confirms a bullish island reversal on SPY. The 12/20/21 bottom establishes a potential higher-low pattern (447.35 - 12/3/21 low and 451.14 - 12/20/21 low). Also, the recent Dec 2021 consolidation came within striking distance of the bottom of the pivotal Mar 2021 uptrend channel (450), reaffirming the primary uptrend.


The challenge for SPY is to maintain above initial support at 447-451 and then surge above 471-472 (Nov/Dec 2021 all-time highs) accompanied by strengthening of the MACD, RSI, and ADX, +DI, and -DI technical indicators. Since the 2-month technical base is 24.54 points, a breakout above 472 renders the next SPY rally toward 484 (top of the Mar 2021 uptrend channel) and above this to 496.5 (2-mo breakout projection) and 518 (Mar 2021 channel breakout target).


Source: Courtesy of StockCharts.com

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