Even if we follow the Daily Charts for short-term swing or intraday trades, it’s helpful from time to time to assess the structure – and especially key levels – of the weekly charts of the ‘big three’ US Stock Market Indexes.

Let’s see what these higher timeframe charts are now saying about the broader stock market:

First, the S&P 500:

Of all the factors on the chart, I want to call your attention to three facts:

1.) Reversal Candles are forming into the upper Bollinger Band (especially the NASDAQ)
2.) Volume and Momentum are Clearly Diverging
3.) We’ve seen this situation before twice – as highlighted – so history may repeat

Let’s start with Fact #1:

The markets are clearly overextended and forming stall/reversal candles into the upper Bollinger (2 Standard Deviations above the 20 day average).

#-ad_banner-#On the surface, this would be very bearish – or at least should give us pause from trading the bullish side – and that’s correct from a classical standpoint.

Keep this in mind as we review Fact #3 shortly.

Now, Fact #2:

Similarly, the price trend/rally is being undercut by declining momentum and volume – both of which have declined (formed lower highs) as price continued to new recovery highs.  This is especially clear on the daily chart.

Our first goal is to assess the existence of a trend – which we clearly can label as “up” (in fact, I’ve been calling it a “Creeper Trend“) – and the second goal is to assess the health/strength of that trend.

Volume, Momentum, and Internals (participation) tend to be strongest at the START of a new trend and then trail off/diverge towards the latter part of a mature trend.

This brings us to Fact #3:

We’ve seen this game before and the outcome now could be similar to what we saw then.

Compare November 2011 to the current April (so far) peak in 2012 to the following prior rallies:

*July 2009 to January 2010
*September 2010 to January or February 2011

Would you describe these rallies as I have objectively defined the current rally?

“Overextended with negative divergences and (some) reversal candles into the upper Bollinger.”

I would describe them as very similar and I would point out one critical fact:

In both cases (the initial peak in January 2010 and February 2011) price pushed one more time to a new recovery high that defied all belief – or at least the majority belief.

The peak of the late 2009 rally wasn’t in January, but in April 2010 just ahead of May’s Flash Crash.
The peak of the late 2010 rally wasn’t February, but May 2011 which was about two months ahead of July/August’s collapse.
Fact #3 simply suggests that we may see another “repeat performance” of price continuing to surprise us to the upside… but not before an initial down-swing/retracement that will initially seem like – and may be – an intermediate top.

Anyway, keep these three facts in mind as you view the current Weekly Charts.

Here’s the Dow Jones which is similar in structure to the S&P 500:

For reference, I highlighted the sideways or consolidation period after the late 2009 rally and the late 2010 rally.

The implication – IF history repeats – is that the next few months could be turbulent yet contained within similar “Range Boundaries” that developed previously.

The NASDAQ – thanks in part to strength in Apple (AAPL) – has been the strongest of the ‘big three’ and is currently forming the clearest weekly ‘doji’ reversal candles:

The NASDAQ formed three weeks of reversal candles – dojis – into the upper Bollinger.

Just for fun, take a quick look near August 2009 to see three similar doji reversal candles into the upper Bollinger.  Price continued higher in a stellar “Creeper Trend” or Positive Feedback Loop.

We saw three smaller doji candles in December 2010… yet once again price continued higher.

This is just a quick look at the Big Three US Stock Market Indexes with respect to recent history and indicator repetition (overbought/divergent rallies… which continue, consolidate, then crash).

Take a moment to study the past and monitor whether or not the present action continues to move similarly to the prior two examples as each day goes by.

As traders, we often have to juggle what’s actually happening (in price) with what “should” be happening (in indicators).