"Divergence Watch!"

By: Robert Helgason | Tue, Feb 17, 2004
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In this weeks wrap-up -

In this weekends wrap-up we will cover

1. Fundamentals - General Market Thoughts
2. The Current Technical Outlook -
     2.a. Short term Perspective - Channels, Indicators, Counts
     2.b. Long term Perspective - Elliott Counts, and some targets
     2.c. Gold and Silver
     2.d. Leaders and Shakers
3. Sentiment Indicators
     3.a. Volatility Studies - VIX
     3.b. Put / Call Ratio
     3.c. Commitment of Traders
4. Conclusion

1. Fundamentals

The markets began the week on an up-beat although they faltered and took a pretty steep dive on Friday. Caused by a combination of a negative Import/Export figure, and a lower than expected Sentiment figure, the broad market sold off pretty readily.

Although there was plenty of action going on in the economic field, I think we'll concentrate entirely on technicals this week, since the picture is pretty interesting.

2. The Current Technical Outlook -

2.a. Short term Perspective

What was surprising about Friday's drop is that it took place right at the lower trend line - exactly the time we should be feeling a good deal of support. A strong uptrend spends the majority of it's time at the upper end of it's band, and bounces quickly off the lower. Although we did do a double bounce in December, and then rallied like never before, it is something to keep in mind over the longer term. Now wouldn't this be an exiting week if it began with a drop below the trend line? Since we are right in the middle of a move, I'm not going to make any predictions on where we are headed, although upside still has my vote until proven wrong by a break. What is also very interesting is the strong divergence with the Dow, which made a new high this week - the NASDAQ wasn't even close. The semiconductor index, a component of the NASDAQ, has also lagged, with Intel sitting right at it's recent low of 30.0. What the bulls should be looking for here is a rebound in the semi's and telecom sectors that would lead the NASDAQ off it's support. Bears, of course, can hope for the opposite, since a breakdown in the semi's, a leading sector, is bearish for the general market.

Now despite Friday's move, we haven't exactly fallen off a cliff here. There is still a very definable channel containing the action. What it does call for, however, is a strong bounce on Tuesday. If we get a weak rally, or a break of the channel, we could very well revisit the Feb 5th low. If the semi's and the Dow Transports weren't so weak, I would strongly anticipate a bounce at this point - however, do to that market weakness, and the no-support drop off on Friday, I am going to stay neutral for the time being.

Charts of Interest

The Transports have stalled at the "magical" 50% retracment level. This will definitely send the Dow Theorist / Bear Chartists into a frenzy of market calls. Personally, I see this as just another example of intermarket weakness that is beginning to crop up everywhere. Intel, for example, is sitting right on support at the moment, having failed to make a new high in January. As stated above, a strong day on the NASDAQ should equate a strong day for Intel as well - if it doesn't, things aren't so pretty anymore.

Oil has been an interesting mover lately ever since 9-10 analysts called for a move back down into the 20's. The 35 level has served as stiff resistance after we managed to break 32.5, and looks as if it is about to get 'served.' With summer coming up fast, and some very complacent ideas about oil production saturating the general market, this could become a story real quick. Historically, rising oil prices are pretty darn negative for an economy, since it raises costs for every imaginable sector - consumers of course would also get disgruntled at the thought of 3$ oil. Does a fall in the transports go hand in hand with rising oil?

2.c. Gold and Silver

Gold bounced as I thought it would. 400$ played strong support for the gold market, and all the bugs need right now is a trip up to the new highs without 400$ getting kicked over. The HUI is acting bullish as well, with a lot of great gold stocks in breakout mode. BGO for one looks like it is busting out of a bull-flag.

Dollar took another beating this week although I still think it's looking for form a bottom.

3.b. Put / Call Ratio

We are still heavily weighted on the call side although puts picked up a bit on Friday.

3.c. Commitment of Traders

To say it simply, all three parties of the COT index have been very wrong at one time or another in the past couple months. No one displaying any sort of edge at all over the other. Therefore, I'm going to keep an eye on it for a while, but not report anything about it while it remains useless. The link to access the charts is posted below.

Charts available from www.vtoreport.com.**

4. Conclusion

Although shortened by a seemingly pointless holiday, it still looks like it is going to be an exiting week. We got expirations on Friday, and a decent calendar to roll through - so get ready for a fun week. Divergences and varying sector strength is going to be the thing to watch this week.


Robert Helgason

Author: Robert Helgason

Robert H. Helgason

PDF available from www.theTrendlineTrader.com

Disclaimer: It has been said that "those who don't know say, and those who know don't say." These reports are for intellectual purposes only. If you actually trade them, please do so because you personally came to the conclusion that it really is a good idea. All facts and charts are posted as accurate to the best of my knowledge, but no guarantee is given. Bottom line : Do your own research, and come to your own conclusions. This is just a pamphlet of ideas written with bad grammar - so use with care.

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