At the time of my most recent article, we had just begun the stock market rally out of the July 2nd bottom and I suggested the rally would be able to continue higher, which it did, until the SP-500 1100 level stopped it on 3 consecutive days. Since then, we have taken 45 points off the index and today began a successful rally from 1057 that ended the day at 1083.
I have little doubt that the momentum generated today will soon yield another attempt to crack through 1100. However, I am skeptical that we will be able to get much higher than 1100 on this particular rally. Please, let me show you why.
I use a momentum indicator, the True Strength Index (TSI) to generate buy and sell signals. One of the pre-cautionary techniques I employ is to anticipate divergences between price movement and the indicator’s movement. The following chart of both the VIX (Volatility Index) and SP-500 gives us a confirmation today that a rally is newly underway. Namely, the TSI indicator’s reading of the VIX has turned down and for the SP-500, it has turned up.
What the chart does not specifically tell you is that the SP-500, when it reaches 1100+ this time, is highly unlikely to also reach a TSI reading greater than its previous high of .62 This means that a new price higher than 1100 will be accompanied with a lower high reading of the TSI, thus creating an unfavorable divergence.
Likewise, the VIX low TSI reading of -.55 is unlikely to be surpassed with this rally. The next chess move, then, will be for the SP-500 to correct downwards after surpassing 1100, then try to overtake the TSI high it makes in the initial process of cracking 1100. (Click on the chart to ENLARGE)
This next chart is of the $TICK and, like so many indicators I have reviewed recently, it shows us that we are not presently at one extreme reading (urgency to buy) or the other (urgency to sell). If you peruse the chart from left to right you will notice that as the tick drops, price drops. And as the tick rises, price rises.
Our current reading is near the $TICK indicator’s 200 dma, suggesting neutrality, but a longer term view suggests the $TICK is likely to complete its current pendulum swing (begun at SP-500 1010) by going to an extreme much higher – carrying price with it.