Divergence Resolved in Apple

Jan 5, 2008: 7:33 AM CST

Apple (AAPL) recently completed an ideal momentum divergence which has resolved to the downside.

Imagine momentum divergences as you would a coiled spring that is building up pressure. To release the pressure, the spring must resolve to a neutral position, but it doesn’t always have to do so all at once.

Apple recently showed us how divergences with price and momentum are resolved nicely to prior support zones.

Notice the “swing” nature of price, as price made two recent “higher swing highs.” The momentum oscillator (bottom panel) failed to confirm new price highs, and under the market principle “Momentum Precedes Price,” we could have expected a resolution (or counterswing) to the recent price highs. In other words, we could expect a temporary price rejection of the recent swing high.

Divergences do not imply trend reversals, or in fact reversals of any kind of their own. Divergences are indicative of losses of momentum on the side of the market that is currently predominant.

They simply mean that odds are favoring a counterswing, and the opposing force (in this case, the sellers) now have a stronger than normal opportunity to exert their influence over the price.

Recall that price moves in waves and counter-waves. Divergences merely lend greater confirmation that a counterwave is coming and that a short-term trade (often a “scalp” relative to the observed timeframe) can be entered with better than normal probability of success. Divergences are good for a small target only.

Also, recall that any divergence trade you take will be countertrend by its very nature, and thus a tight stop needs to be placed in the event that the trend reasserts itself with force – you don’t want to be caught on the wrong side.

7 Comments

7 Responses to “Divergence Resolved in Apple”

  1. Ana Says:

    Corey

    This is esentially what I reckon the market will behave going by Tubb’s Model or Wyckoff re Accumulation phase during the dominant trend eg during a downtrend, which is playing in the Indices.

    Once the accumulation phase of buying volume builds up during the downtrend, a reversal to the uptrend must come into play at some future time.

    Please see my comments at

    http://www.traderfeed.blogspot.com/

    Ana

  2. Corey Rosenbloom Says:

    Ana,

    Thank you for your comment.

    It looks like the broader indexes favor further downside movement than upside. I’m not familiar with Tubb’s or Wycoff’s models as much as I need to be.

    I’ll check them out for more information.

  3. Ana Says:

    Corey

    You can read about Wyckoof l, ll, & lll at

    http://tradingsuccess.com/blog/richard-wyckoff-ii-101.html

    Hope this helps
    Ana

  4. ar Says:

    Speaking of divergences, Corey, what do you make of the fairly substantial positive divergences in key breadth indicators versus index levels? I am talking about Summation Index, McLellan, and 10 and 20 day EMA of NYSE A-D. The SPX and INDU, on January 4, 08, hit (approximately) the lows reached in August and November. But the Summation, McLellan and NYSE A-D averages are well above the levels they were at when the last 2 index lows were hit, and higher on each index low. Logically this means that each index low was made by decreased issuer participation, heralding a market bottom, but is that realistic in light of the other doomsday signals which indicate that a bear market may be just beginning?

  5. Corey Rosenbloom Says:

    Ana,

    Thank you for the link! I’m reading the article now.

    Corey

  6. Corey Rosenbloom Says:

    AR,

    While there’s never a 100% perfect way to predict the market or trade effectively, I always tend to err on the side of the price/volume/breadth/momentum etc charts – I follow the technicals and try to read what the market is telling us through participation or lack thereof and base my decisions on that. I don’t follow the larger breadth oscillators/indicators as much as I should, but your interpretation of the analysis is correct.

    It’s been a while since I’ve listened to the TV media – kidding of course, but in all seriously, my financial decisions are made through charting and sector rotation insights, which still are charting but in a broader picture.

    That being said, charts can conflict, and the more you analyze, the more you’ll get confused (as per my experience).

    For the time being and until proven otherwise, the indexes are still above their 20 period moving averages on the monthly charts and the longer-term uptrend is still in-tact… but each day seems to threaten that position more and more.

    I try to play the market one swing at a time and one day at a time rather than attempting to project the next six months or one year in the future. I’m better at anticipating short-term movements, and so I try to make my living there daily.

    It all fascinates me, however!

  7. ar Says:

    thanks for your response. i too find that following the financial media is something that is virtually impossible to stay away from and uniformly harmful. analysis paralysis is also a big issue. there are so many charts, timeframes, indicators, etc… that it is very easy to use TA as pretext to justify decisions already made for who knows what reason.