Given where we are with the markets right now, I thought it is worth observing the potential for some negative divergences which may be about to play out.

Following the S&P we made multi year highs in the past couple of weeks, and with that both RSI and MACD indicators made high points not registered since mid February. If we see the markets go on from here to retest  recent highs or even surpass them and both the RSI and MACD fail to make fresh highs, technically we will have a clear bearish divergence.

Earnings growth continue to weigh on sentiment, particularly out of China, Alcoa kicks off US earnings season on October 9th, there is clear scope for disappointment. Europe, despite recent bond buying plans, remains a significant concern and whether Spain will ask or delay a full bailout remains key. Other factors to look at are, the VIX is at extreme lows suggesting levels of complacency, and precious metals although being an outperforming asset class over the past couple of months stalled in the past couple of sessions at a time when one would have expected further gains as the Bank of Japan followed the lead of Europe and the US in easing.

My view is that we will see one more phase of risk on in the next 2 to 3 weeks, and if the negative divergences highlighted earlier play out think that we will see a significant reversal in the markets. Levels for the S&P to focus on are 1476 and beyond that the 1489-1500 range on the upside, should a reversal take place 1428 and then 1389 would be targets. It is also worth mentioning that October is notoriously a dangerous month of the year.......Good luck, Bally.

Philip Ball | Sales and Trading