Thursday, April 01, 2010

Divergences Showing Up in the Stock Market

Note the divergence between the ES futures (top chart), which made a fresh high this morning, and the Russell 2000 Index (IWM, bottom chart), which has stayed below yesterday's high and well below its prior peak. During the market's solid run up, small cap stocks led the way. Now we're seeing them underperforming, and that is showing up in the rather tepid readings from the new 20-day highs vs. lows. We've seen, thus far, only a little over 1000 stocks make 20-day highs so far today, well below the 3000+ new highs from earlier in March.

If you examine daily charts of the S&P 500 sectors, you'll also see that many did not register new highs so far today. I'm keeping a close eye on those divergences, as failure to follow through on the upside would target a return to the recent trading range.


Rob said...

Excellent point. Thank you for the consistent analysis.

Gustavo's Trades said...

Brett, in addition to what you mention, I also use's S&P 500 Heatmap for a quick glance at the health conditions of any certain intra-day move.

Whenever the move is strong, the colors will be either bright green or bright red for all sectors.. Otherwise you'll quickly spot a lot of dark green/red, illustrating the engine is not firing on all cylinders and it is likely to revert back to the mean..

Anyway, since I'm not able to look at charts because I work full-time, I have to seek out web sites that allow for fast decision making, Finviz is one of then, Vertical Solutions is another one I always go back to. Not to mention, of course, your mid-day briefings on price action and behavior related to WAP and TICK readings.

I then digest this information to answer one key question: Are we likely to keep moving or not by the end of day? This drives my decision-making regarding hedging my option positions or not.

True, on super busy days I have to rely on contingent orders to do the hedging without the above mentioned analysis behind, but that's the cost of trading and working full time :)

Hope this helps, Gustavo