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Divergence City
How to Use Simple Momentum
To Determine Trend Direction
3 Portfolios (Top Chart) plus
Worldwide and Mostly USA ETFs Portfolios
(scroll down)
48 weeks--July 4, 2008--May 29, 2009
Charts: Weekly--Hypothetical
See Comments below
The chart above is a semaphore that signals the beginnings of a trend change is at hand.
Trend changes are universal phenomena. Stock portfolios, indexes, and ETFs move mostly in the same direction at the same time, differing only in relative magnitudes of move. These stock portfolios above and the ETFs portfolios below
show striking evidence of trend similarity. More important, they show parallel evidence of change when it occurs or is about to occur.
(Note. It may be easier for you to open a second browser alongside this one using the same URL in its address bar as above. You will then be able to see text and charts side by side simultaneously.
This week, the Internet Set and Paradigm portfolios above clearly break out to new trend highs. Their Money Flow lines (the lower set of curves) do not. This is a divergence. It warns of a possible imminent trend
reversal in each.
The reversal will occur if the Money Flows do not follow through to score their own new highs above their high-water marks of May 8th. If either price trend ticks downward before a new Money Flow high is scored, then the trend has changed, and positions should be sold.
If Money Flows make new highs before prices tick down, the continuing uptrend is reconfirmed.
The Classic Portfolio is a case of 'inharmonious action'. Its current price is below its price node of May 8th. Yet its Money Flow made a new high last week--an 'effort without result'.
Next step. Watch for a reconfirmation of uptrends or a confirmed divergence into downtrends.
The following two charts below are ETFs. Comments appear beneath each.
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56 weeks--May 2, 2008--May 29, 2009
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In the Worldwide ETFs chart above, the most recent, clearcut, change-in-trend price node occurs on March 6, 2009. Price makes a new low, taking out the low of November 21, 2008. Neither of the price-momentum series makes new lows. This is a trend-change setup. The next price closes higher. The new uptrend is confirmed. The proper action is to go long.
You could consider buying on the May 6th date itself, seeing that both the momentum series have already turned up on that date. The portfolio price has advanced 32% since then. But the safer course is to wait for the price-rise confirmation.
Thus, both price momentum series have made new highs, confirming the price uptrend. However, the 180-day series is guilty this week of 'inharmonious action'--with a drop this week vs the new high in price--a possible early warning sign.
Note in the 90-day momentum series the giant effort-without-results episode over the two weeks following December 26, 2008, a sign of forthcoming price weakness which did indeed collapse into new price lows eight weeks later. By contrast, from March 27,2009, the giant 180-day-momentum thrust did follow through, accompanied by steadily rising higher prices along the way.
Next step--watch for some further disharmony in the 180-day series or its moving to new highs itself along with price.
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The Mostly USA ETFs chart almost exactly parallels Worldwide's. The same conclusions apply.
The first signs of possible trend change from up to down are now appearing across the board in the form of emergent divergences and inharmonious behaviors among porfolio prices, Money Flow, and momentum series.
The prices and characteristics of these five portfolios express macromonumental equity holdings and activity. As they go, so goes the world. The current rally is maturing rapidly enough now to crest in July or August, then fail and lapse into a resumption of the generational bear market which has been underway since October 2007 and is not destined to end before Fall this year or 2010-2016.
Late Update. Friday's closing prices (June 5th) rescued all portfolios except Classic. Money Flows and both ETFs' momentum series followed through upward to finish at new highs, keeping pace with new price highs. But the message further emphasizes the 'effort-without-results' phenomena as the Money Flow and momentum series continue to soar above their previous May 16, 2008 and August 8, 2008 high points while prices lag far below their own highs a year ago on May 16, 2008.
Previous articles with definitions and examples
here,
here, and
here.
Lists of Portfolio Components. Stocks. ETFs.
Caution:
without back testing, the 'method' is conditional. It needs thorough modeling. It could be experimentally added to the current ETFs subscription letters if there is enough demand. Does that interest you? Send an email here:
ETFs add experimental momenta. (These already exists in the form of Money Flows in the 3 Stock Portfolios tables and chart.)
Written
6/3/2009 2:14 p.m. EDT
Posted
6/7/2009 1:06 p.m. EDT
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