The current divergence in the weekly Dow Jones Industrial AverageSM (INDU) chart with its ROC is 31 months and counting. While lengthy, such a divergence is not uncommon. Since 1930, there have been eleven ROC divergences lasting more than a year. Figure 1 displays a very compressed weekly chart with all divergences and also includes.
Specs for Weekly Line Chart of INDU:
Price & Volume are on a log scale
Volume with 20-week SMA
34-week ROC with 21-week SMA
ROC divergence > 12 months
Extreme ROC levels noted at 1.25 (bullish) and 0.85 (bearish)
Figure 1: Weekly Line Chart of INDU with 34-Week ROC & Volume
Since details are difficult to discern, here are a couple of observations for the ten previous divergences:
- All but the last divergence (2003-2007) occurred during various stages of secular bull markets*
- Mid-1967 through mid-1985 experienced no such divergences
With only ten data points, note the data that follows is not statistically significant:
Divergence Period
- The ten divergences had averaged 25.5 months with a median of 23.5 months
- The shortest divergence was 13 months and the longest 48 months
- The average gain during the divergence period was 31.5% with a median of 33.1%
- The smallest gain during the divergence period was 6.5% and the largest 46.6%
Post Divergence
- The post-divergence period averaged 9.3 months with a median of 7.5 months
- The shortest divergence was 1.6 months and the longest 20.8 months
- The average decline post-divergence was -26.0% with a median of -23.8%
- The smallest loss post-divergence was -7.5% and the largest -53.0%
It was noted most divergences that formed from bullish extremes for ROC (+1.25) were resolved by moves to bearish extremes in the indicator (+0.85). On Thursday a more detailed view of the current divergence and past divergences from extremes will discussed.
* See the 1/21/10 Market Trends article for secular bear periods from 1900-1999
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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