A Perfect Picture of Relative Strength Divergence ~ The Risk Averse Alert

Thursday, March 06, 2008

A Perfect Picture of Relative Strength Divergence

OEX 5-min
As expected, Wednesday's S&P 100 Relative Strength breakdown ... following the stock market's strong, late-day advance on Tuesday ... indicated Tuesday's S&P 100 intra-day low (602.54) "will be tested, and possibly taken out, before a solid bottom is in place."

Now keep an eye on last Friday's (2/29) Relative Strength low. As the S&P 100 gropes for a bottom, Relative Strength should not reach as low as it did last Friday at the open.

In fact, the larger picture still unfolding should look much like it did today, at least up until about 2:50 p.m.

Do you see how Relative Strength was trending upward as the S&P 100 was moving lower throughout the day? Well, once the S&P 100 hits bottom sometime in the days ahead, the Relative Strength picture, starting from last Friday's low, should look much the same.

Diverging Relative Strength was the condition that led to Tuesday's Trade Initiation. The S&P 100 was declining lower, but Relative Strength was improving. You see this clearly.

So, look for a similar divergence, starting from last Friday's Relative Strength low, as the S&P 100 trends lower over the days ahead.

You might notice today's sell-off took the S&P 100's Relative Strength down to a critical point. Connect last Friday's Relative Strength low with yesterday's (Wednesday) and you see this. As persistent as today's selling was, Relative Strength held up.

Therefore, expect the stock market to bounce tomorrow (Friday) or at least hold up.

Today's decline, although expected, likely does not mark the ultimate bottom from which the S&P 100 is projected to launch upward toward its 2007 highs. That bottom might not form until the S&P 100 declines to the 590-595 range. This is the preliminary target.

Per the Risk Averse Alert projecting a stock market advance unfolding sometime during the coming 5-8 week time frame, there's just one proviso. 594.78 is the S&P 100's January '08 intra-day low. This cannot be violated and you should be aware of that.

Stay tuned...

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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