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Divergences

Divergences

Courtesy of Allan

I want everyone to be aware of a developing divergence in the market.  Attached is a chart of the SPX with our Trend Model, Fibonacci levels and at the bottom of the chart, the Elliott Oscillator.  The Elliott Oscillator measures momentum and its most potent use is to identify divergences between prices and momentum.
 
On the attached SPX chart I’ve labeled three areas of divergences between SPX prices and the Elliott Oscillator, i.e. new highs or lows in the SPX that are unaccompanied by new highs or new lows in the Elliott Oscillator.  In each case the market reversed within days of the divergence.  (Although the chart is only showing divergences from the past six months, this particular pattern goes back at least to 1995 when I first became aware of this indicator.) Let’s take a closer look:
 
(1) The first divergence on the chart occurred in late April and within days the SPX topped and fell from a high of 1212 to a low in early July of 1027.
 
(2) The second divergence occurred at that early July low at 1027. The market bottomed within days and has now risen to 1160.  
 
(3) The third divergence is occurring now. 
 
This is no guarantee of an imminent top as divergences are not an exact science and as you can see from the previous two divergences, it sometimes takes days for the market to reverse. But I look at a lot of indicators and patterns and because this one has been so reliable in the past, I wanted to pass it along.

We are still trend followers, but it doesn’t hurt to look at what could be coming down the road and cause our models to reverse.  We have been waiting a long time for a tradable SELL Signal and have endured a few false alarms, but this is one more sign that a change in direction is lurking in the shadows.

 

 

 

Past performance is not a guarantee of future results.

Allan’s “Trend Following Trading Model,” is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Allan’s offering PSW readers a special 25% discount. Click here.  For more details, read this introductory article.

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 If signing up for Randy’s free webinar on options strategies (from Schwab), they require responses of $250K or more assets to invest and 36 or more trades per year. 


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