Monday, June 15, 2009

MACD Sell Signal

A powerful negative divergence MACD sell signal was triggered today in the stock indexes. If we follow Gerald Appel's advice on using the MACD, we would only buy back if the MACD itself makes a new high above its June high even if the stock indexes make a new high. This is critical to understand because until the markets come below the May 20 high, there is still a chance that the current selloff is a 4th wave a smaller degree. We would not want to buy the next breakout unless the MACD confirms, and we would not want to exit short positions on a minor new high unless the MACD makes a new high.

My hunch is that this is not a 4th wave. Just like the positive divergence buy signal that occurred on November 25, which led to a rally above the 50dema, we should expect a move to or below the 50dema now.

The question was asked as to why I gave the fib retracement levels relative to the May 13 low and not the March low. The reason is that the .618RT to the May 13 low around 34.59 also happens to be just above the current 200dema level of 34.25. Until that level is broken decisively, the larger fib retracement levels should not come into play. If that level is broken, then we can look to a larger retracement toward the Jan/Feb highs.

The current near-term turn dates as well as the post-election year seasonal chart suggest that this correction will be a short one regardless of the depth. For a probable example of this type of correction we can look back to the March 2007 correction that ended abruptly at the 200dema. Of course, it will not follow this pattern exactly, but something similar I expect. So we will need to monitor the confluence of retracement levels and turn dates while looking for a positive signal to get long again for the final runup into late July and early August.

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