Strategy Central

[Walkingshadow]

Hi Vestor,

Fair enough. You are right, there is some evidence of bearish divergence in the SPX. I don't trade that, so I tend to not watch it much.

Anyhow, it is not consistent across the indices. Actually, partly because of that, and partly because there are outright sell signals, I am short the RUT and MID now, while long NDX and the Dow.

So yes, I agree there is some evidence in some indices of bearish divergence, but my point is that I consider the magnitude of that to be reasonably tame, and not typical of what one usually sees before a sharp, major correction. Remember, sometimes bearish divergence is resolved by the market moving down to only a limited extent, only to see technical rejuvenation from oversold conditions trigger a new rally. Sometimes, the market will not even move down at all under these circumstances (admittedly, less likely).

So to me, it is not sufficient to say there IS bearish divergence, that is pretty common, and may resolve differently under various conditions. It is more important to try to gauge how strongly discordant the technicals are with price action, and also to determine the breadth of that discordance (i.e., is it consistent across several indices, or mostly in just one or two?).

In this market, there are no fat pitches (at least not yet), so I think one has to cherry pick, bide your time, lie in wait, and tailor the position to fit the index and market. Broad-brush strokes have not worked well this year.... just look at the marked discordance between the NDX and the COMPX or the NDX and the Dow, for example. From the beginning of January, neither a long nor a short position in both held until now would have worked well overall for both indices.


WS