{"id":13599,"date":"2012-08-22T01:08:53","date_gmt":"2012-08-22T08:08:53","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=13599"},"modified":"2012-08-22T01:08:53","modified_gmt":"2012-08-22T08:08:53","slug":"bearish-divergence-to-bearish-convergence","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2012\/08\/22\/bearish-divergence-to-bearish-convergence\/","title":{"rendered":"From Bearish Divergence to Bearish Convergence"},"content":{"rendered":"

The Australian dollar (FXA) continues to provide a useful leading indicator of the likely direction of the S&P 500 from day-to-day and week-to-week. After pointing out the signs of a bearish divergence on Thursday, August 16th<\/a>, a notable bearish divergence opened between the S&P 500 and the Australian dollar the following day. The Australian dollar gapped down significantly to open the U.S. trading session and never recovered. FXA lost 0.9%, closing near its lows on the day. The S&P 500 (SPY) managed a marginal gain on the day as it closed just under fresh 52-week and four-year highs.<\/p>\n

What has followed from Friday is an interesting mix of signals, each time featuring a lead by the Australian dollar as I have come to expect. On Monday, August 20th, the Australian dollar’s gap up during the U.S. trading session contradicted the S&P 500’s race to lows from the open. Over the course of the day, the S&P 500 drifted upward and closed almost flat. What happened today, Tuesday, is perhaps even more significant than last week’s bearish divergence. Today, the Australian dollar – S&P 500 relationship quickly moved from bearish divergence to bearish convergence.<\/p>\n

In the chart below, I use Rydex CurrencyShares Australian Dollar Trust ETF (FXA) instead of the currency pair AUD\/USD to focus on the U.S. trading hours. I use a candlestick chart on FXA to clearly distinguish it from the solid line for the S&P 500. This format also helps emphasize the gaps from market close to open.<\/p>\n


\n
\"From<\/a>
From bearish divergence to convergence: The Australian dollar vs the S&P 500<\/figcaption><\/figure>
\n<\/center><\/p>\n

For today’s trading action, the S&P 500 surged to fresh 52-week and 4-year highs. FXA gapped up as well. However, it immediately sold off from the open while the S&P 500 quickly raced higher. In response, I tweeted<\/a> the following:<\/p>\n

“$AUDUSD has another bearish divergence from $SPY today. Not confirming impressive move to fresh highs. #forex”<\/p><\/blockquote>\n

Sure enough, the S&P 500 topped out soon thereafter and proceeded to print its own very bearish pattern: a false breakout. (And, yes, in the chart below, those are really a bunch of May highs from this year and previous years.)<\/p>\n


\n
\"The<\/a>
The S&P 500 experiences a false breakout<\/figcaption><\/figure>
\nSource for charts: FreeStockCharts.com<\/strong>
\n<\/center><\/p>\n

I zoom in on the last seven weeks to make the false breakout clear. The S&P 500 broke out to fresh 52-week and four-year highs but faded into the close, ending the day BELOW the breakout line. This bearish pattern puts the onus on the buyers. A lower close within the next few days will pretty much confirm a topping pattern (see “Another Blow-Off Top for Yelp.com<\/a>” for an excellent example of THREE such topping patterns in one chart).<\/p>\n

The days going into the Labor Day weekend will be critical. I earlier expected the bearish divergence from last week to play out slowly over this time. If instead, the S&P 500 follows through so soon on a fresh bearish bias, such action will set up the stock market for a correction at least as big as the ones that have interrupted the index’s stair-step climb from the June lows. Note that the overall bullish bias remains as long as the next trading low remains above the last one. (Also see “A 5% Decline In The S&P 500 Within 3 Months Would Be A ‘Gift’<\/a>“).<\/p>\n

Be careful out there!<\/p>\n

Full disclosure: long Australian dollar (versus euro and the British pound)<\/p>\n","protected":false},"excerpt":{"rendered":"

The Australian dollar (FXA) continues to provide a useful leading indicator of the likely direction of the S&P 500 from day-to-day and week-to-week. After pointing out the signs of a bearish divergence on Thursday, August 16th, a notable bearish divergence opened between the S&P 500 and the Australian dollar the following day. The Australian dollar … Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[386,997,62],"tags":[998,309,448],"class_list":["post-13599","post","type-post","status-publish","format-standard","hentry","category-australia","category-sp-500-analysis","category-technical-analysis","tag-correlations","tag-fxa","tag-rydex-currencyshares-australian-dollar-trust-etf"],"yoast_head":"\nFrom Bearish Divergence to Bearish Convergence - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2012\/08\/22\/bearish-divergence-to-bearish-convergence\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"From Bearish Divergence to Bearish Convergence - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"The Australian dollar (FXA) continues to provide a useful leading indicator of the likely direction of the S&P 500 from day-to-day and week-to-week. 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