Tuesday, October 11, 2011

A word on divergence:

A few posts ago I described the sudden and sharp decline in the Dow from the late July price peak through to early August to be a final Elliott “C” down wave. At this time investor temperament changed from bullish to bearish causing investors to stampede out of risky assets and into safe assets. Now after a late August advance and a September swoon, we found most of the major North American stock indices once again sitting at or just below their relative early August lows. The question was; do we hold, or do we fold?

What I look for technically during difficult times like this is divergence.

Divergence is a condition that occurs when two lines on a chart move in opposite directions vertically. A technician will traditionally look for divergence between a stock's direction relative to the direction of a technical study such as an oscillator or the MACD.
Divergence can also be observed when doing inter-market studies such as gold vs. the gold stocks, a large cap index vs. a small cap index or price vs. volume. There are two kinds of divergences: positive and negative which can be also described as a bull or bear setup.

Our chart today is the daily closes of the Dow Jones Industrials plotted above the daily closes of the US 10-yr T-Bonds spanning about 5-months. In this example I am comparing the Dow to investor fear as illustrated by the flight into U.S. Treasuries. Note the recent prices relative to their August lows. Last September 22, the 10-yr yield closed below the August 8 low and Dow Industrials closed above the August 8 low. This price divergence has created a bull setup because while investor fear was greater (lower bond yields) the Dow price was higher. This is bullish divergence.


Gettingtechnical.com said...

Hello Followers

I will address all questions later this week - sorry -

And yes I still hold RIM

Bill Carrigan

Gettingtechnical.com said...

October 4, 2011 11:36 AM
Anonymous said...
August 8 lows are violated in the cash market Futures are holding the 10 pm low are you still bullish thinking that this is just a correction of lesser degree and not a bear market?

GT: The April – August was a mini-bear some major indices violated the August 8 lows – but not all – this divergence is typical of a bottom. The same thing happened in late 2008 and early 2009 – B.C.

September 23, 2011 4:40 PM
Shawn Severin
It is hard to believe that the NASDAQ is still in "risk on" mode. The QQQ is barely showing signs of a correction. The action in the NASDAQ this time around is starkly different that that of the 2008 bear market.

GT: The NASDAQ is the leader – a “must own” – technology is one of the dominant themes as a new bull market gets underway.

September 22, 2011 7:14 PM
Piazzi said...
TSX has violated what you had marked as major support

GT: This was a false move – see the October 4, 2011 comment. B.C.

October 1, 2011 10:23 AM
sjalees said...
Hi Bill
Are you still holding RIM? It has hit darn close to Aug 8 bottom.
Best regards,

GT: Still holding RIM – a component of the “must own” tech space. B.C.

September 10, 2011 9:37 AM
dh12 said...
what setting do you use for the very slow stochastic. I can't seem to replicate the same very slow stochastic as your chart on the weekly charts

GT: I use a long 40 time period on top of a slowK and slowD – best on weeklies

Thanks to all Bill Carrigan

Shawn Severin said...

Hi Bill. What's your take on the amount of volume present in the market? Is it sufficient or insufficient or not that important? Some are suggesting there is less conviction behind the recent move due to weak volume. Thanks. Shawn

Trading Student said...

Hi Bill, on Elliot Wave theory. Any possibility of the 2007 high on S&P 500, with March 2009 low and then April 2011 high being a giant ABC pattern over playing out?