The process of analysis is such that there are times when trends emerge and times when things are simply messy. Over the past week, with the halt in the trend of the major indices, something emerged on the charts. This something demanded attention.
Negative divergences appear when momentum does not follow the price movement. When there is a disparity between the price move and the indicator, it is a sign of caution. Not to say that a contrary position can be assumed immediately, but the sentiment certainly turns cautious!
So what is it that’s hinting at being cautious in this market?
Let’s take a look!
The market indices together are saying that the current trend isn’t as strong as it seems. Why do we say so?
Here we have our stock universe Nifty 500. This past week’s close brought along with it a negative divergence on the chart. As can be seen below, despite the price making a higher high, the indicator went on to mark a lower high. When this happens, we get an insight into the inherent strength of the market. Or in this case, weakness.
Does this mean we can go ahead and start building short positions in the index constituents? Not so fast. This is simply the first sign of caution. Unless individual stocks confirm the weakness, there is no need to jump the gun. What can be considered is observing if the stocks are halting crucial levels that would be logical levels to pause. In those cases, one could consider booking profits and holding on to some cash in order to be prepared when more favourable setups present themselves.
Click on chart to enlarge view.
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