Precision Divergence
How to Measure Divergences with
Marvelous Precision
to Reduce Risk and Increase Proftits
(100 Stocks--3 Portfolios)
Weekly--Hypothetical
47 weeks, June 1, 2007--April 25, 2008
and 45 week Top, July 30,1999--June 9, 2000 example
See Comments below
CLARITY & PRECISION
This picture is far busier than I would like it to be. But, with one step at a time, it should leap into clarity, and you will perceive its significant utility.
You may recognize the weekly Money Flows chart from the 100 Stocks--3 Portfolios 'system'. It shows the average price of each of the three portfolios from the combined 100 Stocks portfolio. The extra busyness springs from the various slanted lines I have added. The normal busyness inheres in the use of distinctive geometrical shapes. But their clarity of distinctiveness provides the precision that enables prompt action.
The top three curves, demarcated by boxes, show weekly closing prices for each portfolio. The bottom three curves, fluctuating around the zero base line, show weekly Money Flows for the corresponding portfolio, demarcated by color-matched dashes.
A Money Flow, as we use the term here, means the speed or energy with which a stock is gaining or losing price levels. For example, to the left, the top red line, slanting upward, shows that the price of the Paradigm portfolio is continuing to rise while its speed or energy of price rise is now falling, shown by the lower red line slanting downward.
Same way with the green lines, descriptive of the Classic portfolio's external and internal price behavior.
In both cases, an internal weakening is measurably and visibly evident in the face of continued rising prices. That's 'divergence'. It should be acted on promptly after a clear and visible sign that prices have peaked. That occurs when rising prices above the preceding peak stop and turn down. In this case, that will be the week of October 19, 2007, the first tick down. The following week offers rising prices to sell into.
The Internet Set Portfolio offered no divergence in this instance. Nevertheless, since risk reduction should always be a high priority with you, you permit two out of three portfolios to vote you into an across-the-board selling posture. You sell into rising prices in the selling week.
The declines from each price peak to each succeeding bottom price are -31%, -20%, and -17% respectively (top curve, downward). The sell-off lasts for five months. Better to be in cash, or short.
The slanting lines to the right show clearly the divergences under way for each portfolio. Both Paradigm and Classic hit bottom the same day, March 7, 2008. Their first rising price after making new lows occurs in the following week, March 14th. That is the signal to act--on March 21st--the vertical gray line on the chart. Buy both. In the case of the Internet Set, your signal week is the same as that of the other two portfolios, March 14th. The week to buy follows immediately, on March 21st, on new price lows. Bingo! A bargain.
Five-week gains from buy-action week (the vertical gray bar) to the end of the chart are +26%, +7%, and +5% respectively.
This kind of divergence phenomena occurs frequently. The first example I ever posted was during the earliest months of this website's existence in mid 2000.
I called it 'incongruency' then. It was, and is, a clear-cut textbook example. When you get there, be sure to click on the Click here link to see the picture. The pattern is repetitious and instructive.
A list of components in each portfolio is
available here.
Caution:
without back testing, the 'system' is conditional. (More in a later issue.)
Comments
4/29/2008 14:37 p.m. EDT
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