This week the S&P 500 and other major indices tested and held their first supports. $SPX is up a fraction of a percent. $SPX dropped below our stop-loss on Tuesday, but buying was already evident on Wednesday. By end of day on Wednesday $SPX printed a hammer-like candlestick. Next day a powerful rally confirmed that the support held for now. Charts of SPX, QQQ and IWM here
We may be seeing some weakness underneath the surface in the markets, however, especially in the large-cap universe. I highlighted the ongoing divergence in the On-Balance Volume for $SPX for past few weeks. Now we can add a divergence in the AD-Line for $SPX to the list of (mild) concerns. The AD-Line broke below the low from March 11 this Tuesday while the index itself made a higher low. Bearish divergences at all-time highs are generally not a good sign.
NYA chart here
GDX, the gold miners ETF, is acting considerably weaker then gold. Could it be the leading indicator? GDX lost almost 1.5% for the week and broke yet another rising wedge formation on Thursday of this week. More telling, however is the fact that the Advance-Decline lines for GDX hit new lows on Friday, while GDX itself is still about 12% away from its 52-week lows set in November.
Gold charts here
XLE Chart here
That is the reason I spend a lot of time and effort first determining what is a major, primary trend of a stock. If it is up, I will ignore all bearish setups and only trade on the long side. If the trend is down, I will ignore all bullish setups and trade only on the short side. Sure, you will miss some bear market rallies and an occasional breakout in stock. But going with a trend is like floating down the river instead of trying to fight the current – it is just easier.
Best Regards and have another great trading week!
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Alexander Berger (www.MasterChartsTrading.com)