The top chart for today’s article displays three of ten Rate of Change (ROC) divergences that have occurred since 1930. Two of these started from bullish extremes and ended with a move to bearish extremes. Given a current divergence from an extreme range, it seems reasonable to expect an eventual corrective move, but what’s expected and what eventually plays out is something we’ll only know in time.
While viewing the data summarized in Tuesday’s article, what struck me most was the fact that only the last two cases have occurred in secular bearish markets. I can only speculate that central bank intervention may play a role in that, which makes assessing market weakness a bit more challenging. It seems the current divergence could persist with the Fed wild card in play, but eventually I believe it will be worked out as others have in the past.
Figure 1 provides a weekly line chart of the Dow Jones Industrial AverageSM (INDU) chart with more detail than previously displayed. Although longer-term divergences have been the primary focus in the last two articles, a shorter-term divergence seems to point to an intermediate-term correction that may in the making.
Specs for Weekly Line Chart of INDU:
Volume with 20-Week SMA (log scale)
Bollinger Bands (20-Week SMA, +/– 2SD)
14-Week +DI, -DI & ADX (log scale)
34-week ROC with 21-week SMA
ROC divergence > 12 months
Extreme ROC levels noted at 1.25 (bullish) and 0.85 (bearish)
Two additional indicators were added, both of which point to intermediate-term weakness.
Note the higher ROC peak that appears prior to the divergence line; the initial surge from extreme lows was disregarded in those charts that had such moves.
Figure 1: Weekly Line Chart of INDU with Bollinger Bands, ROC, ADX & Volume
The current short-term move upward may be important on an intermediate-term basis given relatively lower lows on peaks when using Bollinger Bands. It’s possible this week’s close will resolve this issue, but it may need to do so in convincing fashion. ADX is pointing to a weak trend in the move from this June’s low which minimally could set into play an intermediate-term decline. More as it unfolds.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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