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An Update on Broad Market Divergences

We have been tracking the deterioration of the underlying market since July, even as the indices pushed to fresh highs earlier this month.

In my Weekly Strategy Session each weekend, I take that analysis from this blog and my videos to the next level. Here is an excerpt from this past weekend. Thus far this week, the divergences obviously remain relevant as the indices are starting to give way.

If nothing else, these definitions and examples should help you incorporate the indicators referenced below into your arsenal as a trader.

As an update to those broad market divergences, consider the Dow Jones Industrial Average and S&P 500 Index weekly charts. Both continue to present bearish RSI divergences which have been playing out for months. 

For reference, the RSI is simply the “Relative Strength Index” used to identify changes in technical momentum. Above 50 is generally considered a bullish RSI, with above 70 viewed as overbought. Trending below 50 is considered a bearish RSI pattern, with below 30 considered oversold.

On both the Dow and S&P, these RSI weekly divergences are still playing out as price weakens, and thus remain relevant. By nature, divergences can drag on for quite some time before bold resolution is seen (a large move lower to confirm fully, or a violent reversal higher to negate them). But as long as they are still in play I believe they merit your attention as evidence of the increasingly selective market. 

In addition, NYSE McClellan Oscillator (“NYMO”), which is a simple market breadth indicator tool, finished last week at -3.99. 

Generally speaking, when NYMO is above zero it tends to indicate bullishness for stocks, and below zero, bearishness. However, extreme readings can indicate overbought or oversold conditions. Above 50 is considered to be overbought, while below -50 is considered oversold.

NYMO has now adequately worked off oversold conditions with the bounce last week. But it still remains in bearish territory, below zero, after having negatively diverged to price in late-July and earlier this month as the indices hit fresh highs. This continues to be a divergence worth watching next week to see if bulls can move and hold it in positive territory.

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  1. Bozo on a bus

    Most interesting comments, Chess.

    One market-timing blog I read is http://www.mojena.com/. The author uses many factors, technical, fundamental, and sentiment, to arrive at a probability of significant market moves up or down. The last switch to sell was several years ago, and then it quickly reversed. It switched to sell on Aug 18th after the modest drop, which was extremely unusual (meaning it’s probably driven by fundamental deterioration). The indicator continues to indicate sell.

    Do you see this decline as becoming a substantial correction or worse, or is it still too soon to make a prediction?

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    • chessNwine

      I try to respect every decline after a steep uptrend as the potential for a major top. Ultimately, I am at my best by letting it unfold and taking some quick shots here and there until the next meaningful trend develops.

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