Divergence

May 29, 2002
Kevin Haggerty

It was
another light volume day, with
NYSE volume trading 75% of its average at 960 million, with a volume ratio of
32, and breadth -386. There were some noticeable divergences yesterday which we
must be ready to capitalize on. The primary one is that the Nasdaq volume, which
was also approximately 75% of its average, had a positive volume ratio of 51, as
did the NDX at 53. There was also a divergence in percentage decline yesterday,
with the Dow
(
$INDU |
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(
$SPX.X |
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PowerRating) -0.9%, and Nasdaq -0.6%.
This kind of divergence usually precedes a contra move, but the duration can’t
be quantified. It can be just a one- or two-day swing. That doesn’t hinder the
daytrader, as our current trading plan has us taking any reversal long entries
on weakness, just as happened yesterday.

The
(
SMH |
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PowerRating)s gave you a
1,2,3 lower bottom at the 1.0 volatility band, which was 39.37. The intraday low
was 39.35 before giving you entry on a reversal above 39.40. The SMHs ran to
40.40, not bad considering the slow day. Hope all of you seminar attendees
caught the trade.

The SPX made a double
bottom right at the 1.5 volatility band, or 1070, but it only ran to 1077 before
closing at 1074.55. The
(
QQQ |
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volatility band of 30.49. Standard entry was above 30.62, as the QQQs ran to
31.10 and closed there. The downside for the past three trading days has been
at or just after the opening, and these overreactions have been setting up
intraday reversal long patterns for us. Yes, we all would like to see a
sustained uptrend, or even a sustained downtrend so it would give us some
continuation entries with follow through, but that’s not the kind of tape we are
in right now.Â

If you are comfortable in
sequence trading, which gives you the ability to trade both ways regardless of
time frame, you have had opportunities on a daily basis. If you’re still stuck
on page 24 of Edwards and McGee, then you are lost in this market, and are
probably tired of losing or not doing much trading.

In spite of the light
volume day, the QQQ volume increased 23% from the prior day, as the NDX went
positive on the volume ratio. The
(
SPY |
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PowerRating)s traded 24 million shares, which was
the most in the past six days. That also tells me to be alert for movement over
the next few days.

Some of the activity we
noticed the prior day carried over, as the oil service stocks were green, along
with the biotechs. The
(
$SOX.X |
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PowerRating) surprised me as I thought the herd would
follow through on the downside yesterday, but the SOX finished only off -0.6%.
Gold continued its run, with the
(
$XAU.X |
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News |
PowerRating) +3.2%, and the US dollar down
near its September lows, which could be the base for a rally.

Stocks
Today

Have a good trading day.

Five-minute chart of
Tuesday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Tuesday’s NYSE TICKS

Divergence

BUY THE FEAR, SELL THE GREED

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