Larger Divergences Form – Selling Ahead?

Jul 21, 2008: 2:28 PM CST

Today’s reversal in the indexes give us pause about the short-term continued bullish direction.  Let’s look at the multiple momentum divergences that have formed on the higher intrday time-frames.

DIA 30 minute chart:

On the 30 minute chart, we see the classic “Three Push” or “Three Swing” pattern, all three of which have formed negative momentum divergences.  Under the principle “momentum precedes price,” we can potentially anticipate a correction or ‘sell-swing’ in prices in the short-term.

Negative momentum divergences often highlight the ‘loss of momentum’ on the side of the bulls/buyers, as higher buying pressure is slowly diminishing and ‘momentum’ or price acceleration declines.  An object in motion often slows before it stops and reverses, and prices in the market place often follow this pattern.

In addition to the momentum divergence, volume has been diverging as well.  Higher prices are not being confirmed by higher volume, and higher prices on lower volume is often seen as a sign of bearishness as well.

On the 15-minute chart, the divergences are a little clearer – though there are four divergences that have formed.

DIA 15 minute chart:

I would classify this as a “lengthy” momentum divergence, one of which is being made on lower volume (which is evident on the chart).

Recall that the recent rally has occurred under the backdrop of a confirmed bear market where the higher time frames are in confirmed down trends.  Any such rallies are classified as ‘counter-trend rallies’ and can often occur and end quickly with little warning in both directions.

Be safe out there, and don’t overstay your welcome in the postions you are trading.

4 Comments

4 Responses to “Larger Divergences Form – Selling Ahead?”

  1. Ethan Says:

    Hi Corey,

    I enjoy reading your blog everyday. Thank you for sharing your insights!

    I have a question about your MACD parameters that you use in your momentum-divergence analysis. Are the MACD parameters set to the standard 12,26,9 or do you use custom settings? If custom settings, would you mind sharing them?

    Thanks!
    -E

  2. Corey Rosenbloom Says:

    Hey Ethan,

    Thank you for reading and for the comment!

    I use custom setting, reproducible in StockCharts.com as 3, 10, 16 in the three boxes for MACD. This is known as the “3/10 Oscillator” and converts the MACD into a swing oscillator, momentum oscillator, and trend oscillator.

    It’s the difference in a 3 and 10 EMA, which is then smoothed by 16 periods.

  3. David Says:

    Corey,

    Thanks for posting this was a very informative post.

  4. Panamon Says:

    Uhm.. interesting! It would be great to know something more about MACD variables someday, if you have the time: it seems the inventor of MACD itself suggested not to stick to the default settings to appreciate at full this instrument. Thanks again 🙂

    Panamon Rn+