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The S&P 500 Is Plagued With Divergences


We may be closing in on a topping pattern that is likely to give us a strong correction sometime before year end.

The SPX option chain is telling us that this monstrous move is unlikely to be able to hold through the end of the year based on current implied volatility levels. Clearly these levels will adapt to market conditions as they change every day during normal market hours, but at this point, they are not providing a strong indication of significantly higher prices before year end.

By now, readers are probably expecting me to make a prediction about where prices are going to be headed. I do not do specific predictions because I do not feel that I know any more than anyone else regarding future price action. However, I do believe we are closing in on a topping pattern that is likely to give us a strong correction sometime before year end.

In addition to the professional versus retail investor charts and probability-based determinations for future price expectations, there are two more indicators that are showing a divergence or a non-confirmation signal from the price action in the S&P 500.

As shown below, the money flow indicator failed to break to new highs as of Monday, which thus far fails to confirm the recent move to new highs in the S&P 500.

The chart above does not require much explanation. The last time we witnessed a major divergence was in the autumn of 2011, which culminated into a nasty correction.

In addition to the divergence shown above in the money flow indicator, there is also a strong non-confirmation signal in the NYSE Advance / Decline Index, which is shown below.

I want to be clear to readers that I am not trying to imply that prices are going to collapse tomorrow or even in August or September. I am simply trying to point out through the use of a variety of analytical methodologies that buying here is a rather risky endeavor.

While more upside may await in the short term, the intermediate term could be plagued by strong selling pressure. One thing is certain: I expect the selling pressure to come out of nowhere, and the retail crowd will most certainly be left holding the bag. Risk is high.

Editor's Note: JW Jones offers more content at
No positions in stocks mentioned.
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