Over the last several months, I have followed two charts that give an indication of a slowdown in participation as those slowdowns are usually followed by a give back of one degree or another. I have used a chart that employs PVT (Price Volume Trend) and this chart which shows the percentage difference between SPX and its 250EMA.
I've watched both of these charts to get an idea when the market might be weakening. These two chart setups performed equally well until the September highs. At the September highs, this PPO chart showed negative divergence between the % difference of the 250EMA and price, a warning of impending doom, while the PVT chart synced with the market giving no hint of what was to come. I'm not giving up on the PVT chart but, IMHO, this PPO chart proved to be more predictive going into the September highs and as a result I am paying closer attention to this chart over the PVT chart.
This chart is very easy to set up. Just add PPO to an SPX chart, set the PPO as I've set it on this chart and follow along.
It's important to note that each move must be isolated from previous moves. In other words, once you've got a bottom, like we had in mid-October, then you start all over with the PPO % difference and focus on the move at present and any signs of weakness going forward.
At the moment, we have a situation where the PPO seems to be rolling over but this is not a warning as it is in sync with the SPX. In the days & weeks ahead, it will be important to watch for the PPO to stay in sync with the SPX. However, there will come a time, because there always comes a time, when SPX makes a new high but the PPO does not and sets up negative divergence instead. We are not there yet but if you set up a chart like this one then when we do get there you won't be surprised.
GL
Comments
satelite
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its almost 2 months between the lines, and here we are again after two more months :)
CurtisM
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Hadn't actually noticed that but that is interesting.
jasonexcel
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Thank you, CurtisM. Didn't see your post for a while. For me, I prefer to ignore the recent "V" shape on market. I would like to treat it as a 'bug' on the stock market. :)
SimGlenn
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Welcome back Curtis - hope all is well. I am also becoming concerned as the SPX is now trading only about 25 points from the upper channel meaning near-term downside risk is 4x at about 105 points. It's been a nice rally and I have been expecting the SPX to finish out the year in the 2050 - 2080 range. I sense some serious trendline resistance near these levels with at least a small pullback likely in the next week or so to provide some relief for the Y/E rally to finish out. My primary concern is that the "V"-shaped rebound was so sharp and sudden, the potential has mostly been expended. I have been slowly taking some profits and am inclined to continue raising some cash. I'll watch for your next post on the divergence you mentioned. Thanks once again for your help - Glenn
CurtisM
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Thanks Glenn, not really back but I will try to put up a chart every now and then. At the moment, other than the fact that the markets came a long ways in a short period of time, I'm not really seeing any red flags out there. If I do see any red flags appear and I have the time, I will try to put up something.