Negative Divergence

Divergence is a situation that occurs when two lines on a chart move in opposite directions vertically. Divergence can be comparing a stock's direction to the direction of its RSI, its MACD or a momentum oscillator. Divergence can also occur between two related asset classes such as the price of gold and the price of a gold stock. There are two kinds of divergences: positive and negative. Positive divergence occurs in a down trend when one line moves higher while the other is still declining. Negative divergence occurs in a uptrend when one line moves higher lower while the other is still rising.

Note our Dow Industrials vs. Dow Transports chart with the Industrials are just at or above the January peak – now note the Transports are well below the January peak setting up a negative divergence condition. This could be the early setup for a Dow Theory sell signal and keep in mind that while rebound bulls are short they are never followed by severe crashes – but rather a short trendless bear – a stock picker’s market 

The Crude Risk Premium (2)

Just to review - the current run up in the price of Crude is the risk premium the market tacks on due to the uncertain outlook for the larger crude producing Arab states. The “risk premium” beneficiaries would be the senior and junior crude produces and the oilfield service companies – names like Suncor Energy Inc, Canadian Natural Resources Limited, Cenovus Energy Inc, Precision Drilling Corporation and the BMO Junior Oil Index ETF (ZJO) Other beneficiaries in the consumer space, Dollarama Inc., Dorel Industries Inc and Tim Hortons Inc. In the US stocks like Altria, Disney, Yum Brands and Coca Cola are just beginning new intermediate cycle advances

The energy complex has been red-hot lately which is good if you’re on board, what to do if you have missed the big move? Do you hold your nose and buy now? Suggestion; the oilfield service companies will benefit even if crude stalls in here. Note the weekly chart of Precision, Savanna and Trinidad plotted with a 10 and 30 week MA - all just in the early stages of a run and posting new 52-week highs. New 52-wk highs are like new 52-wk lows – the first one is usually not the last one.

The A-B-C Correction (2)

Five weeks ago here I suspected the Dow Transports was at the beginning of a normal Elliott Wave A-B-C correction that typically follows an impulse wave.

The correction will usually begin above the 50-day moving average with the A wave down breaking under the 50-day and stopping at support at above the 200 day MA. The subsequent recovery B wave fails to make a new high (swing failure) and the following down C wave breaks under support at the 200 day MA and the selling can get nasty. Sometimes the recovery wave B will exceed the beginning of wave A – see our Dow Transport daily chart.

According to Elliott Wave International, In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 14 and 15. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown in Figures 16 and 17.