Dr. Arnout Ter Schure
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Wall Street Sign, NYC

In my article from a little over two weeks ago, see here, I had “three individual and independent tools/methods pointing first and foremost higher and towards the same target zone/region (SPX4065-4185) for a significant top.” Fast forward, and the index reached as high as SPX3984 on Mach 17 and made a secondary high of SPX3982 yesterday. Was that all she wrote, so to say, or can we still expect the target zone to be reached. Since markets are stochastic, dynamic, and probabilistic, nothing is ever set in stone. Therefore, one must continuously (re)assess the charts to see if once assertions based on prior price data are still correct with the new price data at hand: anticipate, monitor, and adjust if necessary.

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Figure 1. S&P500 daily chart

The S&P500 is still in an uptrend, but technical indicators are diverging.

A strong uptrend has price above its 10-day SMA, which is above the 20-day SMA, above the 50-day SMA, and subsequently the 200-day SMA. Besides, all these SMAs should be rising. In short, price>10d>20d>50d>200d and all SMAs rising = a 100% Bullish price chart. It is then logical to expect a Bullish outcome. Conversely, when price<10d<20d<50d<200d and all SMAs are declining, then the chart/index is 100% Bearish, and one should expect Bearish outcomes.

Moving averages are, however, not predictive but trend following and therefore they are not the holy grail. Adding technical indicators, such as the MACD, RSI, a stochastic oscillator (FSTO), and Money Flow (MFI), can give another layer of evidence to assess the next likely move. So let’s put the current daily chart of the S&P500 to the test (see Figure 1 above)

We can observe that the index is above its rising 10d>20d>50d>200d SMA. Thus it is still 100% Bullish (green horizontal arrows). What about the technical indicators? The MACD is on a buy, the RSI is above 50, while my stochastics’ based Buy/Sell indicator is on a buy as well. However, the MFI is weak as it is below 50. Besides, the RSI, MACD, and MFI are all negatively diverging (red dotted arrows). What does that mean?

As the price is rising, it is doing so on less Strength, less Momentum, and less liquidity. Now divergence is only divergence until it is not, i.e., it only takes a few solid up days to erase it, but for now, it must be noted and suggests the uptrend is weakening. But, based on the SMA setup, the uptrend is still intact. The index is still above the lower black dotted trendline, connecting the March 2020 low with the October 2020 and March 2021 lows. However, the dotted purple trendlines suggest an ending diagonal pattern, i.e., wedge, is forming, which resolves bearishly when completed. See here.

Bottom line: The S&P500 is still in a 100% Bullish uptrend based on its SMA-setup and trendline support and the technical indicators. However, the latter are negatively diverging since at least mid-February telling us the uptrend is weakening and running on less liquidity. The Bears’ first order of action is to close the index back below its 50d SMA, which should bring it back below last Thursday’s low. A move below the early-March low (SPX3725) is needed to confirm a more pronounced correction down to SPX3250-3500. Until then, the index can still try to move higher to SPX4065-4185, albeit all the divergences.

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