One of the indicators of market weakness is when the price
of the stock makes new highs but its major indicators like the MACD makes a
lower high. In the attached chart, you will see that the S&P500 ETF “SPY”
is making new highs on price while the indicator similar to MACD but not the
same, is making a lower high. Such price divergences usually resolve itself in
the direction of the indicator. It is an early warning of a correction. See the
heavy orange line sloping downwards while the price line in the heavy teal
color is pointing upwards.
(MACD: Moving Average Convergence Divergence – or more simply, the
difference between its 12 period exponential moving average on price to the 26 period exponential moving average of its price. If the MACD is headed upwards, then the near term momentum is stronger as the 12 period exp moving avg is greater than the slower 26 exp moving avg)
Markets take a long time to top out, and I am certainly not
thinking we have a huge drop ahead of us or that one needs to sell and go to
cash. But that is all a matter of perspective. If you have made some profits,
this would be a good time to bank some. For myself, I will sell some call spreads for next month on SPY, letting time decay be on my side. Selling a call
option spread will be a successful strategy for me if SPY stays sideways or goes down. It will still make some money on a small up movement as the time decay
element is in my favor. I would lose money if SPY jumped higher.
The stock is still above the blue support line on the chart, but my
trading system has also flashed a down signal with the arrow downward. Pretty
early I might add.
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