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business newsWhy Divergences Work
By
Vinny Catalano Mar 12, 2009 11:45 am
ETFs may only pause, not stop, in the near term.
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Over the past 2 months, several bank executives stated their businesses were doing well enough to produce positive earnings results. Yet, time and again, investors ignored their statements and continued their steady march to investment hell. Until Tuesday.
What made Tuesday’s news from Citigroup’s CEO Vikram Pandit different from past such bank executive statements, were the market conditions for equities over the past few weeks. The "setup," I call it. Here, the setup is the divergences between the headline indicators and the internal dynamics of the market.
As I noted last Thursday,
“Then there's the issue of divergences. One of most powerful technical-analysis tools, divergence signals are warning signs that the breadth of a move is lacking. Specifically, and as I noted in several prior postings, whenever an index breaks to a new high or low, other important indices and indicators (such as advance/decline) must confirm that move. In the current case, and for the first time since the current bear market got started in the summer of 2007, several key indices are not confirming the new lows reached by the major US indices (Dow Industrials, Dow Transport, S&P 500).”
In other words, because headline indicators making new lows were not being confirmed by more than a few other important indices, the markets were primed for any good news. In this case, the catalyst being Citigroup’s announcement. Now that the setup (along with the market’s short-term, deep, oversold condition) produced a nice bounce, we need to know whether this is the real deal or just another market chimera. To answer that question, we need to consider the following going-forward factors. For as delightful as the rally was, there are 2 conditions that must be met for there to be further sustainable upside action.
The first one was met on Tuesday when both the advance/decline on the NYSE and its advance/decline volume met or exceeded a 10 to 1 ratio. Well, it did so in spades. In other words, price was being matched by breadth - something that hasn't occurred since the bear seized control.
No positions in stocks mentioned.
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