There’s been a fleck of dorsum together with forth tweeting virtually the value of divergences amidst marketplace indicators. Jason Goepfert of the fantabulous SentimenTrader service rightly notes that divergences are non not bad predictive tools. Indeed, divergences on a nautical chart are but observations; their predictive value needs to endure established through testing.
Still, I observe divergences to endure useful observations equally a sort of heads up, a yellowish caution light. If the wide marketplace indexes are making novel highs or novel lows together with a substantial proportion of shares are non participating, I desire to endure opened upward to the hypothesis that the motion reflects a handful of highly weighted shares inside the indexes, non the wide market. This keeps me opened upward to the possibility of reversal, combating whatsoever overconfidence bias I may bring alongside honor to the recent marketplace move.
Yesterday gave us a perfect example of the cautionary value of divergences. When nosotros made fresh lows inward SPX inward the morning, my mensurate of selling programs showed considerable hitting of bids inward my handbasket of highly liquid large cap names (top chart). These stocks were non exclusively downticking, but doing together with thence at the same moment, revealing an elevated grade of handbasket executions of sell orders.
Despite this selling activity, the wide listing of stocks (all listed U.S. shares) was showing reduced selling pull per unit of measurement area (middle chart) equally nosotros made novel lows. My mensurate of upticks vs. downticks across all stocks was showing considerably less selling pull per unit of measurement area at yesterday’s lows relative to the prior recent downturns. That was an indication that intense selling pull per unit of measurement area was occurring inward a smaller grouping of large cap names, but non across the wide market. Indeed, my cumulative mensurate of upticks vs. downticks amidst all listed shares was hitting novel highs yesterday! (All information inward a higher house from e-Signal).
On the bottom nautical chart (data from Barchart), nosotros tin encounter how this departure played out alongside honor to stocks making fresh three-month lows. Although nosotros touched toll lows intraday yesterday, the seat out of shares listed on all exchanges did non expand the seat out of novel lows made from the final few days. Again, at that topographic point was intense selling pull per unit of measurement area inward the visible large cap group, but a lack of selling behave on across the wide market.
Keeping tabs on marketplace forcefulness together with divergences, I find, helps decease along me cognitively flexible. For mortal similar myself who was curt the marketplace going into the day, that flexibility proved to endure quite useful. It is really slowly to instruct caught upward inward the stock marketplace together with lose sight that it’s truly a marketplace of stocks. Looking at what the components are doing tin endure really useful inward anticipating the crusade of the broader market.
Further Reading: Views on Breadth