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Tuesday, June 4, 2013

Divergence Raises Caution Flag

Intel Inside
Intel Inside (Photo credit: jurvetson)
Industrials and transports show a disconnect; both on MACD sell signals

Merck (MRK) and Intel (INTC) rose sharply, keeping the Dow industrials in positive territory for the entire day. Merck, up 3.8%, reported success with a key drug trial, and Intel, up 4%, introduced its fourth-generation processors.
At the close, the Dow Jones Industrial Average was up 138 points at 15,254, the S&P 500 rose 10 points to 1,640, and the Nasdaq was up 9 points at 3,465. Volume on the NYSE increased to 879 million shares and the Nasdaq traded 545 million. On the Big Board, decliners exceeded advancers by a slight margin, and on the Nasdaq, advancers were ahead by 1.4-to-1.

Chart Key
The industrials briefly violated their 20-day moving average at 15,275, but with Monday’s advance closed above it. Monday’s gains also focused attention on the support zone at 15,000 to 15,115, since a break there would put immediate pressure on the 50-day moving average at 14,891. The index is trading within a well-defined bull channel but looks “toppy” with a MACD sell signal in force.
The Dow Jones Transportation Average shows a disconnect with the more bullish industrials. This index led all others until March, when it began a series of consolidations and even broke the support at its 50-day moving average in May.
It appears to have broken down from a minor head-and-shoulders formation by closing under a neckline at 6,320. The target for the breakdown is 6,072. And it, like the industrials, received a sell signal from its MACD.
Conclusion: Although the divergence between the two Dow indices is minor, it raises a caution flag. Volatility is picking up, and the sharp sell-off on Friday by the S&P 500 establishes a “line in the sand” at Friday’s low of 1,630.
The S&P 500 reversed Monday, closing 10 points above that support, but with volatility now very high, the possibility of a further correction has increased. On May 24, I said that my guess was that we had seen the highs of the summer months, and recent price action supports that view....
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