Ominous Divergence ~ The Risk Averse Alert

Wednesday, May 30, 2012

Ominous Divergence

Apparently, the burden of maintaining the market's levitation has reached capacity limits in the land of make believe...

$NYAD cumulative

Above is the NYSE cumulative advance-decline line since 2011. Old news is the fact that, were the NYSE Composite Index tracking this measure's relentless increase since March '09 bottom — the cumulative advance-decline line over the interim having risen to far exceed its 2007 peak — the composite index might be well into record territory by now. The fact that it isn't reveals the direction money belonging to strong hands has taken. Strong hands are O-U-T, leaving weak hands to exercise increased selling restraint, that prices generally might continue to rise. This has been the way of it since the very first bailout fix brought the market to bottom in March '09, and has consistently remained so right up to the present moment.

However, new news is that, whatever was being bid up earlier this year to the effect of lifting the NYSE cumulative advance-decline line still higher from its March '09 depths — bringing the measure to far exceed its early-July 2011 peak — its consequence, broadly speaking, proved to be of diminishing effect. The NYSE Composite index failed to exceed its 2011 best...


Weak hands either holding on for dear life or not letting go of "undervalued" prizes (both actions combining to restrain selling), no longer are providing enough tide to lift all boats. In fact, adding to the NYSE Composite Index's negative divergence with the NYSE cumulative advance-decline line are momentum matters pertaining to the index that, all the more distinguish the market's advance since early-October 2011 as technically suspect in contrast to the market's advance following the May 2010 "flash crash" and its aftermath. I covered this some weeks ago, well before index momentum (bottom panel) turned negative. A suspect technical condition is all the more confirmed, then, by the NYSE/cumulative advance-decline line divergence.

With momentum continuing to trend lower, today's hard turn away from the NYSE Composite's 200-day moving average is fitting reaction given the technical backdrop. Which point of reference, indeed, might prove interesting to anyone thinking there is similarity presently with the latter half of June 2011 (as both RSI and MACD are similarly poised), prior to the market's bounce into early July. Then, though, $NYA was above its [rising] 200-day moving average. So, improving RSI and MACD at the time might have been thought more likely indicating conditions suitable for keeping the market's trend intact and effecting a bounce.

Now, however, not only is $NYA below its 200-day moving average, but the moving average itself is trending lower. So, presently improving RSI and MACD might be more a matter of mere technical circumstance coincident with a pause that refreshes. Today's clubbing could mean the market is as refreshed is it will get for the time being.

Fast Money
* * * * *

© 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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!