A Menacing Indicator to Watch

I hesitate to use the word ‘ominous’, but the S&P 500 (shown here in ETF form) is close to generating a very bearish stochastic signal on the long-term chart. When ascending price peaks are matched by descending stochastic peaks, this is often a harbinger of trouble. In this case, there are not the usual two tops headed toward such a divergence, but three, each diverging relative to the other two. A simple way to interpret this is to say that the S&Ps have been unable to get as overbought with each successive, record peak. The implication is that traders/investors have grown less enthusiastic about buying as the S&Ps have achieved a series of record highs spaced weeks apart.

What to Watch For
The divergence would become menacing if the blue line were to roll down through the red line. This would occur if, over the next several weeks, each new price bar closes on successive Fridays toward the lower end of the bar as the S&Ps go higher or sideways. Alternatively, if the rally continues for a couple more weeks, with Friday closes toward the upper end of each bar, that would negate the divergence and turn the stochastic indicator benign (or at least in more felicitous agreement with the uptrend).

We won’t know for at least another 2-3 weeks which is about to occur, but because a third diverging peak could have such dire implications, the chart is worth monitoring closely.