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The Morning Cup of Jo


When will this be over?


Trademark Pending

As we all know, Friday afternoon's quadruple witching got a little dicey. The VIX and VXN both pulled back to, retested and held, their last BO resistance points. Hoofy's SOX fell off and is sitting on the 200DMA along with the Dow Transports. The NDX gave a Bearish Engulfing signal. The AMEX Financial Index is showing a Topside Stochastic Divergence. The Russell 2000, the S&P 600 and the AMEX Broker/Dealer Index all parked themselves on the bottom side of their most recent trend channel.

At this point you may not be entirely sure if the markets are closer to the beginning or the end of this downturn (correction). However, what you should be cognizant of is one of the technical indications that help Techies recognize when the end may be getting near - Price, volume and momentum divergence.

I believe it's important to look, not only at the shorter-term and intra-day fluctuations, but also what the longer-term technical picture tells us. This is where we can get a more broad and clearer picture of what is happening. Divergence between momentum and price doesn't necessarily have to happen when putting in a Relative Top or Bottom, however it definitely helps us add to the weight of evidence in changing trends.

By looking back in history you can see there is an abundance of instances where divergence has played a roll in helping us determine when the markets may be getting close to, or are at, a relative bottom. This is where the momentum indicators play the biggest, and I believe most accurate, rolls. The three I'm referring to are the Stochastic, the RSI, and the MACD. I'm going to bring you back in history and show you a few examples. Remember the 1997 and 1998 corrections. I've put both on one Nasdaq graph below. The most important components you should identify are all three-momentum indicators that have higher bottoms on the second price decline, which happens to be lower. You should also notice the volume of the second bottom is normally - but not always - less than the first bottom.

WONDA Copyright 2004 William O'Neil + Co., Inc. All rights reserved

Just like I said in the 'Jo' a couple weeks ago when talking about the Topside Divergence in the Markets, "One thing we all have to remember, technical indicators are just road signs. They tell us what MAY lie ahead, not what does." The most important indicator, as a Techie, is the price trend. Without that, the rest is meaningless.

I hope this helps!

Until Next time...


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