Yesterday I put up a post about the Ten-Year and while that was well received I know that most people here don't really trade Fixed Income so I thought that I would do a similar analysis of the S&P but only on a weekly and a daily time frame to show you exactly how divergences work (and also when they don't work).  Up first the weekly:

As you can see in late 2008 the market made a new low and so too did the MACD but in early 2009 the market bottomed out but the MACD made a higher low.  This is a typical divergence and what you should look for when looking for market trend changes.  Look at the RSI and again you will see a similar divergence at the bottom in 2008/2009.  I also like to extend the current trend-line on the MACD and look for breaks of that trend-line to also confirm the trend-line (which in this example the S&P had a confirmed trend change in April and then broke the MACD trend line around May/June).  Now the larger pick trend will stay bullish until we can first get a bearish cross on the MACD on the weekly and then if we are lucky a confirming divergence (look to the way left of the chart to see an RSI topping divergence). 

 
Now on to the daily picture:

So I think that everyone remembers the H&S that happened over the summer that many bears got trapped on and we can look back and see what exactly happened.  First there had been a trend-line (that cannot be seen) from when the bottom was formed on the MACD.  The MACD actually curled up after the failed breakout and formed another point on that trend-line.  Look at the bearish divergences on the daily chart and then how they didn't play out.  The daily charts have had a ton of daily bearish MACD divergences (particularly in companies like GS) and so I've decided that it is better to look at the weekly as a better indicator of where the intermediate/longer trend lie.  So while the bearish divergence in the daily looks good as can be seen earlier this year with the failed H&S breakout they haven't exactly behaved ideally which is why I'm not willing to say that "This is definitely the top". 

This isn't all bad news for bears because the daily MACD upward trend-line has been broken now since that down move in September which is the first good sign that the rally is coming to an end.  But I think that the real story will unfold when there is a trend change in the weekly and the weekly MACD finally rolls over and forms a bearish cross and (god willing) a bearish divergence. 

Some things to keep in mind about the divergence:

1.  You can anticipate the divergence if you see the weekly start to roll over (for the lower high) and then can go into a daily to determine if there is also a bearish divergence there and look for better entry points there. 

2.  The divergence isn't broken until there is a clear violation of the trend-line. 

3.  This analysis can be used for any time period (I really feel like it works very well for 15m charts for a look into the future of a day or 2.  For example right now the TY has a 15m bullish divergence and until that trend-line is taken out the risk is to the upside in the TY. 

Thanks again Tim for having me and I hope that you guys enjoy the analysis feel free to leave questions, comments, concerns in the comments and I'll try to get back to you.  - – - Jason

 
The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE.  It is primarily used for short and intermediate term trading.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It's interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.

Both show great value when the major indices make new highs or lows, but the McClennan's fail to validate the movement.  This indicates lagging participation in the ongoing trend and shows the possibility for reversal.  Recently, the S&P 500, Nasdaq 100, and DJIA all made new yearly highs, but the MO and MSI failed to follow.  I’ve marked the divergences on the following charts.  Upon closer inspection many sub-sectors failed to make new highs, including small caps, industrials, materials, banks, and homebuilders.  Truly this bull is suffering from market halitosis.

As always, obey your stops.  This market has proven it has staying power and routinely ignores bad internals to blast higher.  We’ve seen many bounces off oversold McClellan readings over the past 6 months, so be careful at these points.  Taking partial profits, hedging, or closing positions should be considered.

(Editor's Note: I am in awe of the quality Slopers are generating here; wonderful stuff; thank you so much! On a less cheery note, sorry Disqus is stinking so badly. I know how important comments are to the Slope experience – Tim)

From mid-March until this month, low-priced, high-risk issues have been the backbone of my 401-k. They are definitely losing their steam, though, and it's also becoming evident that there are reasons these issues were battered in the first place

Take Lear Corp (LEA), for instance. This stock had a great run-up in the yellow tinted area, shown below. I did pretty well on this ride up. I then "re-loaded" when it headed back toward its trendline, and at first, this seemed like shooting fish in a barrel (see green tint). But look what happened – – it failed to exceed its prior high, it broke its trendline, and it absolutely fell to pieces.

Bear this in mind with such securities – – they are anything but "blue chip!"