06 September 2009

S&P 500 : Bearish signs developing

Let's take a look at S&P 500 on the charts and try to gauge its future movements. Below is the weekly chart in which I have highlighted the rising wedge pattern. It is a very strong bearish development and materializes more often that not.

The volumes are taking a dip which indicates the uptrend is not having a great conviction. MACD is also showing negative divergence, backing the aspect that the index is being pushed upwards, though it is in no mood to go in that direction. the only saving grace for the upmove is the RSI which is getting stronger with the rise, indicating that we are in a trend. Given the indicators I would conclude that signals are mixed. We may keep rising for some more time, but for sure it is not going to be easy. It's time to be cautious.

As long as we are in the wedge shown above, we can expect to see a tired market oscillating between the two trend lines. In case of an upside breakout, which in my opinion is not the expected outcome, we can see a few strong weeks.

The natural outcome of a rising wedge is a breakdown and the minimum downside is the height of the wedge, which in this case is around 180 points. So a 180 point slide is easily possible whenever the wedge is broken. As we know how US markets drive the world, we can safely say that if there is no violation of the wedge in immediate future we can see trading with positive bias. So for Nifty which is my main concern should also be trading higher from current levels. But the sharp slide on the breakdown of S&P would surely pull down markets all over and we can see Nifty as well break few key supports which have developed in recent weeks.


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