Article / 18 August 2016 at 10:00 GMT

How will the US bull market story end?

Technical Analyst / Saxo Bank

  • S&P 500, Dow showing identical technical patterns
  • RSI divergence seen since 2014 on S&P 500 chart
  • Dax trading in steep, short-term bullish channel

Wall Street

The headlines may reveal an undercurrent of nerves, but price action shows that US equity bulls remain in defiant control... but how will the current situation play out? Photo: iStock

By Kim Cramer Larsson

A look at the US indices

The two major US indices, the S&P 500 and Dow Jones Industrial Average, have identical technical patterns.  

In the long term there is divergence on RSI. We have seen higher highs on the price but not on the RSI indicator. Just as it didn’t support it back in 2007...

That is a sign of imbalance in the market. Imbalances can go on for quite some time, as was the case back in the 1990s, but they cannot go on forever and need to be either “traded out” – i.e. RSI has to show a new high – or see a correction that takes RSI below 40 to “reset” the technical indicator.

Also, volume is not supporting the bullish market we have seen the past couple of months; it has instead been falling. 

However, the MACD indicator is not showing divergence, signalling that we could still see some upside. Maybe this is the blowout top I have been looking for since volume and RSI divergence started in 2014. 

A bullish market usually ends with a blowout top where everybody goes crazy buying for fear of missing out.

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Source: Saxo Bank

S&P 500 chart (monthly)

So if history is any guide – and it usually is as we humans never learn from our mistakes – we saw volume and RSI divergence in 1999-2000 and in 2007 just before the bullish markets turned bearish. 

However, as can be seen from the long-term bullish market in the 1990s, RSI divergence went on for quite a few years. From 1996 to 2000 the market went up but was not supported by the RSI.
In 2007 it only went on for about a year before crashing. 

So far this time around, there has been RSI divergence since 2014.  So what kind of scenario is it now? Is it a blowout top, or will these markets continue? Hard to say, but let’s look at the indicators on the shorter term...

S&P 500 (weekly)

On a weekly chart notice the long period of time from 2013 until 2015 with divergence on RSI and MACD, after which the market was hammered quite a few times in Q3 2015 and Q1 2016 resulting in RSI divergence during the last trough in February.

Source: Saxo Bank 

This was followed by a strong bounce, taking most US stock markets to new all-time highs.   

Currently there is no divergence on RSI and MACD indicating that we could see higher levels over the next few weeks. One small warning sign is that volume has faded slightly over the summer. 

The index is being rejected at the 1.236 Fibonacci projection and is testing the upper rising trendline in what could look like a rising wedge. So will it break bullish, or are we facing a short-term correction?

For that, let’s pay attention to the daily chart...

On the daily chart every indicator points to a correction. We see divergence on RSI, MACD and volume, and a rejection at the upper trendline.

The market is set for a correction down to 2,100-2,000 before a possible final push higher. A push that could take the S&P 500 to around the 2,230 level which is the 1.382 projection (see weekly chart).

Then we get closer to October and October is what we call the “jinx” month. Historically, October is the month with the most crashes or market turnarounds. I am not saying we will see a crash but with all the divergence building up across most timeframes, there are indications pointing to greater volatility and corrections in the market. 

The lower rising trendline and a possible break of it could give a good indication. Watch out for the line.

S&P 500

Source: Saxo Bank

DJI 18,765-18,854

The Dow Jones Industrial Average is also forming what could be a longer rising wedge. The upper trendline could be tested within next few days.

As it’s the case with S&P 500, there is no RSI or MACD divergence on the weekly chart, but massive divergence on the monthly indicating short- to medium-term.

(The Nasdaq Composite is only slightly different from the two main Indices. There is massive divergence on RSI there...)

The small-cap Russell 2000 index is trailing the other indices and has not yet made a new all-time high. It is trading in a wide rising trend channel, however, and there is no divergence on the weekly chart. With no “natural” resistance levels” there, we could see higher levels and possibly also a test of the all-time highs.  

However, expect a correction down to around perhaps 1,200 – i.e. a test of the lower rising trendline.

Source: Saxo Bank

The Dax (in the shorter term)

The German Dax index is trading in a very steep, short-term bullish channel. After forming an Evening Star-like pattern showing minor RSI divergence, the index was rejected at the 0.764 retracement at around 10,785 and is about to test the lower steep trendline. 

A break from here and we could see the Dax dropping down to test the 200-day moving average just above 10,000. 

Dax (daily chart):


Source: Saxo Bank


The Dax index broke its medium- and longer-term falling trends last week.

Despite the subsequent setback, the weekly chart indicates that the market could very well pick up its bullish trend going into Q4 and test the major resistance level at around 11,430, i.e. the Q4 2016 peak. 


Source: Saxo Bank

— Edited by Michael McKenna

Kim Cramer-Larsson is a technical analyst at Saxo Bank

18 August
tcat tcat
thank you
18 August
Andrei Shervashidze Andrei Shervashidze
Sorry to bother, but it seems that there are two weekly S&P charts instead of weekly and daily.
18 August
Martin O'Rourke Martin O'Rourke
Thanks for spotting Andrei Shervashidze. It has been fixed.


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