What is this bearish streak of five bars in the S&P500 and other US indexes? Is this just a correction or a new global financial meltdown? Some multi-timeframe momentum analysis might come handy in the understanding the nature and scale of the wave, which is how we arrive at our conclusion.
“When a time frame produces a series of larger than average daily bars in one direction, then (…) larger time frame forces propel the move.”
When a time frame produces a series of larger than average daily bars in one direction, then we must assume that larger time frame forces propel the move. Otherwise the size of the bars would be close to average, or the expansion would hardly last for longer than two bars. Our two-chart presentation shows to what extent the weekly and monthly time frames align or contradict each-other. Weekly time frame means that one week’s price information (open, close, low and high) consists one candle bar on the chart.
December 2014 was the first time since October 2012 when a significant weekly impulse aiming at a new high has been contained by the grey bear resistance zone in the RSI indicator. Above that level the bull moves are mostly sustainable and pullbacks are short lived; below not so much. The most recent weekly major bull wave started to lose momentum in August, and 20+ weeks later it actually seems to be running out of steam. Those who are following the weekly chart are not confident enough to buy breakouts above previous highs anymore. In this environment bears are good to run for at least couple of waves against the trend.
But what about the monthly bar chart? The monthly bulls are solid as rock. They feel like they have a guaranteed ticket for at least one more new high. We draw this conclusion because the RSI is just floating in the middle of the sustainable bull zone (green area). That means that a divergence has formed, which signals a correction that may last a couple of bars, but it’s not going to induce significant selling among the monthly campers. They don’t stir an eyelid on 2-2.5 months of selling.
In the Aggregate
The summation of the two time frames are that although the weekly time frame lost it’s ground at a certain point, monthly buy decisions will be made to at least attempt an additional new high. Since the weekly momentum can’t sustain the trend anymore the market might keep forming new lows until then, which is going to look like a bear trend on the daily and a bear trend, or a larger range, on the weekly. The monthly might move down to right above 50 on the standard 14 period RSI indicator. For example a February close of 1850-1860 would translate as a 55-ish momentum value on the RSI. The current monthly is just about to start the decelerating phase similar to the one that we have observed from July 2014 on the weekly. The lower the next RSI top is, the more likely it will be followed by a total reversal of the 2009-2015 trend.
If you would like to read more about detecting failing breakouts and signals, or when to expect weak follow through check out Anti-Signal: Is There Any Juice Below Today’s S&P Bear Break? where I was covering a related phenomenon on the daily chart. Also I stressed the importance of larger time frame coordination here: Ultimate Edge Checklist.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.