Monday, December 6, 2010 - Market Wrap Up

Momentum:
First, the market continues to close above .8 standard deviations above the 10 day moving average. While the indexes appear to be threatening the high, stochastics are overbought, and the fisher transformed momentum oscillator maybe showing a large divergence. Furthermore, what is interesting is that DeMark indicators are showing perfected sell countdown signals on both daily and 4 hour charts simultaneously.

 

Breadth:

Breadth is also showing some divergences both long running as well as a divergence between the last peak. Looking at the NYSE McClellan summation index it's quite clear that breadth actually peaked out some months ago. Looking at both the oscillator as well as the summation index we can also see a large and visible divergence between this most recent peak, and the previous peak in November. 

The NASDAQ McClellan oscillator and summation index look similar, showing the same divergences, this significant because while the NYSE is not at new highs, the NASDAQ is. If the Summation index and oscillator do not set new highs in short order the bearishness of this divergence increases.

Similarly, the NYSE closing tick, while not showing a sell signal, may also be showing a long running divergence as well as a possible divergence between this current rise and the previous peak. 

Generally, it is not recommended to trade on divergences, since they can simply disappear as price continue to rise. However, as I mentioned in the previous post, sentiment is running very high, so possible bearish signs should be given more weighting. Divergences happen and often times are meaningless, however they almost always occur at turns. So when divergence occur in momentum, breadth, and concurrent with a high degree of optimism, one should be on extra alert.