SP500 v Bank Index - Some worrying signs.

The last couple of days have seen a pause in the SP500, perhaps this is expected after such a continually strong rally in recent weeks, and given the key break of the 1132 resistance this week, we could be merely seeing a corrective pause. Many of the elements I have mentioned in recent weeks continue to suggest medium term we will see further strength, however I certainly do not consider this a given at this stage, and there is one or two matters which still bother me. One of these is the lagging performance of the Bank Index. - The top chart below shows the Bank Index above and the SP500 below. On the face of it, the Bank Index made a break out of its own Falling Wedge in the past 2 weeks, this should and could be a bullish development, however thus far this breakout has been somewhat uncertain.

Looking at a direct comparison versus the Bank Index and the SP500 the picture however looks more worrying. The top chart below shows the past five years of comparison between the SP500 and the Bank Index. I have highlighted the incidences where the price action diverged negatively between the Bank Index and the SP500, this occurred on three occasions in the early stages of the 2007/2008 bear market and each time subsequently dragged the SP500 lower. The lower chart shows the Bank Index v the SP500 in the past six months, note there is a strong similarity between this chart and the period in the larger chart in 2007 at the start of he major 2007-2008 bear market. 

Another concern has been the recent divergence between the VIX Index and the recent gains on the SP500. The charts below highlight this.

Another worrying sign has been the recent Volume on the SP500; during the rally from the late August lows, the volume has been poor, on Monday it picked up a little, however given the big up day and break of key resistance it was not huge, however the last 2 days have seen small negative days, yet Tuesday was the largest volume day since late June (with the exception of last Friday's option expiry day), and yesterday also saw bigger volume than Monday. (See chart below).

Divergences (either momentum or comparison indices) and volume are secondary indicators, in the same way that a warning light on a car indicator panel warns that there is something which needs looking into but does not necessarily mean the car is about to stall, however, the more indicators are flashing, the more caution should be taken - Currently therefore, I read this as an increased risk of a correction to the recent rally, with an outside possibility of a failed breakout of the recent key resistance around 1126 on the future (1132 Cash), which could have longer-term bearish implications.


Further to the above, I have posted below charts showing the SP500 future (8 hour candles) over recent months, note how the price stalled exactly at the Andrews Pitchfork resistance. The second chart below shows this same chart zoomed in, the futures have broken below the base of the rising channel of the past 2 weeks during the European morning session today, support from the neckline (not shown) connecting the June and August highs come in around 1121 on the future (1127 Cash), a break below here could see a more aggressive correction towards the gap at 1105-09 on the future (1109-1113 Cash).