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GREENWICH NATWEST FUTURES
311 S. Wacker Dr., Chicago, Illinois
(October 27, 1997) STOCK INDICES: December S&P 500 futures settled at 944.00 Friday, down 4.65 from the previous week's close. The major monthly and weekly trends remain up. However, the major daily uptrend is now in question as the market settled below major support at its fifty-day moving average (951.20) on Friday. There continue to be many technical warning signals of an impending one-to several-week move to the downside from this price area. Therefore, longs are advised to be on the defensive at this level, and are not advised on a close below 935.50 this week.
A bearish head and shoulders top pattern appears to be forming on the December (daily) chart. The neckline for this pattern comes in at 931.40 on Monday. A close below it, on good volume, would validate the pattern and suggest a minimum downside objective of 880.55. This neckline slopes downward. Because of this, the breakout point and downside target will change daily (approximately .75 lower per day) until a breakout occurs.
Widespread bearish divergence continues to exist between price and weekly momentum indicators. Bearish divergence occurs when a new high in price is accompanied by a lower low in a technical indicator that measures market momentum. This divergence indicates technical weakness and very often precedes a significant move to the downside. There is added significance to this divergence because it appears in many different technical indicators.
Another potentially bearish longer-term technical warning signal can be found on the monthly chart, where the market has put in a key reversal. A key reversal occurs when the market makes a new all-time high, then closes below the previous period's (in this case, last month's) close. (Friday's close completed the price “bar” for the month of October.)
Daily market momentum turned down (bearish) on Friday, and will remain so as long as the 972.20 area loosely contains price on the upside early this week. Bears are advised to watch this area closely, as it may provide a new selling opportunity if tested. In order for price to confirm the bearish technical indications discussed here, 1) a major bearish trend change must occur on the daily chart, and/or 2) the bearish head and shoulders top pattern must be validated on the daily chart. In order to accomplish the bearish trend change, the market must trade completely below its fifty-day moving average while being confirmed by daily momentum indicators.
John J. Kosar
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