The only thing that pays us in this market is price. That’s it. So what we try and do is use a handful of supplemental indicators to help us identify when a change in trend is about to occur. One of the more helpful tools we have to achieve this is momentum. We start to see momentum readings diverge from price, before price ultimately peaks in the coming days, weeks, or months; depending on the timeframe in question.
I personally choose a 14-period relative strength index (RSI) to gauge momentum across asset classes. You can read more about how I use RSI here. In this particular case, I want to focus on the obnoxious amount of bearish momentum divergences that we’re seeing in many of the most important indexes, sectors and stocks around the world. These “divergences” occur when prices make new highs, but momentum simultaneously makes a lower high. It’s a sign that a change in trend is approaching. Since we take a weight-of-the-evidence approach to markets, it’s not just that we’re seeing one or two of these sprinkled around. They’re showing up all over the place.
Here are just a few examples worth noting:
Chile (who led us from the start and a was big reason we got bullish stocks in late Jan)
These divergences are typically a signal of a change in trend. Just to be clear, it does not necissairly mean a reversal in trend. We can go from an uptrend to a sideways trend or in other cases, from a downtrend to a sideways trend.
Become A Member of All Star Charts for further interpretation of this behavior, and more importantly, how we’re trying to profit from it. With Your 30-Day Risk-Free Trial, you gain access to the Trade Ideas Page, the Weekly Letter to Members, an Archive of all the Monthly Conference Calls, access to the Chartbook and Many Other Bonus Features.
Tags: $XLU $SPY $COMP $QQQ $AAPL $FCX $ILF $EEM $ECH $EWZ $IBM $XLI $SOX $SMH