Divergences in SPY
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Divergences in SPY

John F. Carter 12/18/2013

Tomorrow of course, we've got FOMC. In the premium video we've got a lot of things I'm going to be talking about in terms of getting position for that...or what I think is the best way to getting position for that. In the free video what I want to talk about is, I'm getting a lot of questions just about the stock market, is should we be short, should we be long.

What's a bearish divergence mean?

The main thing here is the indexes. We have a bearish divergence sell signal in the market. Now it doesn't mean that, OK, now the markets go straight down, right. What does it mean? It means we have a bearish divergence sell signal on the market. So how that works is again, we got a bearish divergence where prices were making new highs, the rate of change were making lower lows. And then we got two closes below the 21, OK. That's the sell signal.

How does it end?

The signal that it's over would be two closes above the 21 EMA. Now it's normal to come up and test it and then kiss it good bye. So at this point this is completely normal within a sell signal and then, bam! I mean, we guess, I mean I get that we're in this huge rally but having a sell off for like 4 to 6 weeks you know that -- that would be completely normal here.

What will the FOMC tell us?

But of course what we have tomorrow is FOMC. And at this point I do think that FOMC is going to either completely eradicate this sell signal, meaning like, OK. It goes up, up and away and it's going to cause rally time, or confirms it. Now I know that's like, well geez John, that's really a deep insight there. But what I mean is, is on something like tomorrow, post FOMC, if we do sell out tomorrow -- and especially when you take out these lows -- not only is the sell signal confirmed but then we'll typically at least sell off 5 percent. OK. If tomorrow we take these out then we actually ride to a new high. So tomorrow is not about, oh, is it an up day or a down day. Tomorrow, whichever way we close, ends up essentially we'll go about 5 percent up or 5 percent down.

So a long story short, there will be plenty of time to get into this trade. There's just no point in really hurrying. We can wait to see what happens tomorrow and then do our play for the rest of the year that way, all right. Hope that helps. You guys have a great night and we'll see you at the next update.