Divergence Resolved … but So What?

Jan 8, 2008: 7:36 PM CST

Earlier, I highlighted a momentum divergence in the DIA (Dow Jones ETF) which resolved as expected to the upside. However, shortly after completing that divergence pattern and achieving its target, the market sold off extremely hard and beyond any technical analysis predictions.

Notice that as price made lower lows on the intraday chart (which later formed a base), the momentum indicator began developing a clear divergence upwards, indicating odds favoring potential upside.

The pattern is even clearer on the 15-minute chart:

You can almost “feel” the momentum building on the side of the buyers and weakening on the side of the sellers.

However, problems with AT&T, Countrywide Financial, and others caused a late afternoon sell-off.

With price breaking below recent support, the divergence is complete and price appears to be painting a much different picture than earlier.

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