Info!! Using Divergences Inwards Marketplace Forcefulness To Anticipate Reversals

There's been a flake of dorsum together with forth tweeting close the value of divergences amidst marketplace position indicators.  Jason Goepfert of the fantabulous SentimenTrader service rightly notes that divergences are non cracking predictive tools.  Indeed, divergences on a nautical chart are simply 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 position 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 motility 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 convey amongst honour to the recent marketplace position move.

Yesterday gave us a perfect event of the cautionary value of divergences.  When nosotros made fresh lows inwards SPX inwards the morning, my stair out of selling programs showed considerable hitting of bids inwards my handbasket of highly liquid large cap names (top chart).  These stocks were non exclusively downticking, but doing together with hence 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 pressure level (middle chart) equally nosotros made novel lows.  My stair out of upticks vs. downticks across all stocks was showing considerably less selling pressure level at yesterday's lows relative to the prior recent downturns.  That was an indication that intense selling pressure level was occurring inwards a smaller grouping of large cap names, but non across the wide market.  Indeed, my cumulative stair out of upticks vs. downticks amidst all listed shares was hitting novel highs yesterday!  (All information inwards a higher house from e-Signal).

On the bottom nautical chart (data from Barchart), nosotros tin give the sack run into how this departure played out amongst honour to stocks making fresh three-month lows.  Although nosotros touched cost lows intraday yesterday, the release of shares listed on all exchanges did non expand the release of novel lows made from the final few days.  Again, at that spot was intense selling pressure level inwards the visible large cap group, but a lack of selling behave on across the wide market.

Keeping tabs on marketplace position forcefulness together with divergences, I find, helps proceed me cognitively flexible.  For soul similar myself who was brusk the marketplace position going into the day, that flexibility proved to endure quite useful.  It is really slow to instruct caught upward inwards the stock marketplace position together with lose sight that it's genuinely a marketplace position of stocks.  Looking at what the components are doing tin give the sack endure really useful inwards anticipating the travail of the broader market.

Further Reading:  Views on Breadth
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