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March 7, 2010

Lack of Divergence

Much to the chagrin of legions of bears, stocks responded to the employment report by posting a bull run session and setting new highs for the rally out of the February low. In fact, small caps are handily setting new highs for the entire cyclical bull, and the NDX is only a whisper away... both strong signs that this rally has plenty of wind left in it. Another aspect of this rally that should have bears on their heels is the fact that price keeps pushing higher despite overbought conditions.

S&P 500 RSI Divergence

Also note the lack of an RSI divergence on the latest leg of the rally. Traders who are always trying to trade swings based on these divergences are missing the point of the indicator. It is true that major turning points are almost always accompanied by a divergence, but the opposite is not true: a divergence does not necessarily signify a turning point. In fact, there are usually multiple divergences formed before a true swing occurs. However, if a significant swing almost always occurs with a divergence in place, we can at least say that if there is a lack of divergence in the indicator, the next bout of weakness is very likely to be bought to new highs. In other words, bears don't have much going for them at the moment.

In the precious metals arena, silver and mining shares took advantage of gold's pause to improve their ratios against the yellow metal.

gold silver ratio

Given the altitude from which this ratio is starting, I have doubts that it will make it to the usual sub-50 mark seen at the ends of parabolic runs. However, I would expect silver to at least return to pre-crash valuations on this run. So, if gold attains the $1400 mark... which I believe is quite likely if our parabolic move finally unfolds... we will be looking at $25 silver.

mining shares priced in gold

As with the gold/silver ratio, I highly doubt the XAU/Gold ratio will achieve the usual 0.27 ratio seen at the ends of parabolic runs because such a move would require a 125% rally in about 2 months. However, a return to the pre-crash level of 0.21 would bring a 70%+ gain... still a stretch, but certainly not impossible if markets get whipped into the buying frenzies we anticipate.

Speaking of gold's pause, it appears gold is doing nothing but consolidating for another pop higher.

GLD continuation triangle

The triangle projects price roughly $30-35 higher than the current level... just above the $1160 pivot. I suspect that after this pattern resolves higher, gold will be set for its first significant correction of the rally out of February. The question is: will gold manage to fly through the $1160 level so that the correction will constitute a back-test of that level, or will $1160 halt the current move, inducing a back-test of the $1125-30 pivot? There is no way to know a this point, but I do suspect that whichever level is the subject of a back-test will constitute the last, great buying opportunity of this run.

Several days ago I noted in the comments section that platinum of palladium were leading the charge higher for precious metals. Well, palladium is still at it:

Palladium daily chart

All the elements are lining up well for our long-awaited blow-off moves... which, of course, means we'll see a correction in coming days to scare a few people... but we should be set for some spiffy action ahead.

By the way, I have implemented a suggested by Rosabarba to add a tool for sharing posts via Twitter, Facebook, and other services. The tool is located on the right side of blog posts. Also, anyone who follows the Twitter account I have linked to The DOCument will only receive tweets related to trading and finance... basically a convenient way to share the news I find most pertinent.

 

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