We last looked at the Chaikin Money Flow (“CMF“) indicator back in early-June with the semiconductor sector. In this blog post, even as the semis were popular candidates to lead the next bull leg higher, the CMF was diverging negatively to price. Since then, the sector has essentially gone nowhere while standouts like CREE started to crack underneath the surface.
For reference, CMF seeks to gauge the strength of buying and selling pressure based on the Accumulation/Distribution Line over 21 periods (days, this case). In essence, it is a no-nonsense way to judge the volume pattern and price action (price closing in the upper half of the day’s range has a bullish effect on the CMF reading, and vice-versa).
Generally speaking, the CMF is bullish when positive and turning up, and bearish when negative and pointing down. You are also looking to see how long the CMF can hold in positive or negative territory, in order to confirm the potency of a bullish or bearish reading.
When we apply CMF to the IWM, ETF for the Russel 2000 Index, a clear leader of the bull in 2013, we can see how remarkable it is that the small caps have been trending in positive CMF territory for all of 2013, heretofore. Even when the small caps went sideways from mid-March until the first few days in May, CMF always held the line impressively.
For that reason, it is even more noteworthy to acknowledge that the CMF for the small caps has now not only dipped into negative territory, but it failed to immediately recover last week even as the market bounced. In fact, into Friday’s rally the CMF actually turned lower. This, of course, is another divergence. And I am pointing it out because I believe it to be a subtle, under-watched one. What it tells me is that selling pressure appears, underneath the surface, to be more forceful with the small caps than at any point in 2013.
Perhaps it may simply be a case of the late-summer doldrums in the market. But when you see an indicator support a monstrous bull run all year long, only to now clearly diverge, it is something I am keeping a close eye on.
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Thanks Chess. Interesting.
hey , net short.
Thanks Che$$.
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