28 replies to this topic

[IYB]

Just my thoughts on what record bearishness, and deep momentum divergences are telling us, as traders, and perhaps more importantly, what they are NOT telling us, fwiw.

Record AAII bearishness (in it's 25 year historical record) cannot and should not be ignored, imho. BUT....I've always maintained that sentiment alone cannot be used as a timing signal, per se, because it only measures potential for the next move, which is very important to monitor and know, but it still doesn't tell you WHEN the move will occur. IOW, while it's true that over the years, important bottoms have coincided with peak bearishness, the fact remains that in real time, we cannot know what the peak bearishness reading will be. 70% is a RECORD. That's highly significant. But will it peak here? Or at 75%? or 80%? Or 90%? We can't know.

Same with momentum divergences. I've just reviewed dozens (perhaps hundreds) of internal momentum measures, and I couldn't find a single one which has NOT held above the OCT/NOV 2008 lows (though I'm sure someone will point one or two out to me ), as all of the major averages have now moved into new low ground. Many here will argue that this means nothing, just as many will maintain that record bearish sentiment readings mean nothing. I maintain that they tell us something very important: they tell us that the potential for a very meaningful IT rally is at hand. Again, a look back at market history shows important moves spring from big divergences- this market principal has been true for a hundred years and then some, and will be 100 years hence.

But here's the catch. Just like with sentiment, the divergences alone don't tell us when the move will begin. Will it start from here? Or 5% down? or 25% down? or more? We can't know.

So are record AAII bearishness and massive divergent readings in internal market momentum of no value to a trader? Far from it! They tell him two things...the potential size and duration of a subsequent move, and that the time has come to be alert to a trend change.

Now for the last piece of the puzzle....when? IMHO, we will know when the IT advance has begun when momentum itself turns up. Price follows momentum. I use SS's for that purpose. Other traders use different measures. Still others use pure price trends, and of course, that's a completely valid approach as well, as proven by sucessful traders here.

For now the trend is down, and that means shorting rallies is the profitable play for aggressive traders. Until the trend chnges that remains true. In fact, often the very best part of a trend occurs in just the last couple of days of that trend before it changes- implying that possibly the biggest trading profits from the short side still lie ahead.

But I just wanted to express my view, fwiw, about this age old argument, about the value of these technical tools-sentiment and divergences, and my view, again, fwiw, on how they should be viewed.

Good trading, D

Edited by IYB, 07 March 2009 - 05:40 PM.

[Lee48]

Thanks for your thoughts IYB. But the amount of bearishness doesn't look so scary or record making here.
http://www.market-ha...ntelligence.htm

[unosuke]

IYB,

That's good advice well stated.

As someone who looks at sentiment but claims ignorance toward momentum (what kind of technical analyst am I?!), I wonder if momentum divergences on the SPX weekly & monthly charts can be fairly interpreted since price keeps making lower lows (which you addressed), but also because the present I.T. downtrend has not existed for as long as the one from early August to late Nov. '08 (I count 15 weeks then versus the present 9).

Isn't it possible for weekly momentum to give a "divergent buy signal" if the SPX trades in a sideways down pattern for 3 or 4 weeks only to sell off? It sounds unusual, but that's basically what happened in Oct. last year - a weekly low around the 10th, big price swings for 3 weeks, then the market tanked into the Nov. 21st I.T. low.

So wrt the weekly momentum divergence(s), would you need to see only 1 higher low to generate a buy signal? Stated differently, what kind of weekly price action would trigger a strong enough divergence to buy for an I.T. trend change? Appreciate your thoughts.

[tomterrific14]

Just my thoughts on what record bearishness, and deep momentum divergences are telling us, as traders, and perhaps more importantly, what they are NOT telling us, fwiw.

Record AAII bearishness (in it's 25 year historical record) cannot and should not be ignored, imho. BUT....I've always maintained that sentiment alone cannot be used as a timing signal, per se, because it only measures potential for the next move, which is very important to monitor and know, but it still doesn't tell you WHEN the move will occur. IOW, while it's true that over the years, important bottoms have coincided with peak bearishness, the fact remains that in real time, we cannot know what the peak bearishness reading will be. 70% is a RECORD. That's highly significant. But will it peak here? Or at 75%? or 80%? Or 90%? We can't know.

Same with momentum divergences. I've just reviewed dozens (perhaps hundreds) of internal momentum measures, and I couldn't find a single one which has NOT held above the OCT/NOV 2008 lows (though I'm sure someone will point one or two out to me ), as all of the major averages have now moved into new low ground. Many here will argue that this means nothing, just as many will maintain that record bearish sentiment readings mean nothing. I maintain that they tell us something very important: they tell us that the potential for a very meaningful IT rally is at hand. Again, a look back at market history shows important moves spring from big divergences- this market principal has been true for a hundred years and then some, and will be 100 years hence.

But here's the catch. Just like with sentiment, the divergences alone don't tell us when the move will begin. Will it start from here? Or 5% down? or 25% down? or more? We can't know.

So are record AAII bearishness and massive divergent readings in internal market momentum of no value to a trader? Far from it! They tell him two things...the potential size and duration of a subsequent move, and that the time has come to be alert to a trend change.

Now for the last piece of the puzzle....when? IMHO, we will know when the IT advance has begun when momentum itself turns up. Price follows momentum. I use SS's for that purpose. Other traders use different measures. Still others use pure price trends, and of course, that's a completely valid approach as well, as proven by sucessful traders here.

For now the trend is down, and that means shorting rallies is the profitable play for aggressive traders. Until the trend chnges that remains true. In fact, often the very best part of a trend occurs in just the last couple of days of that trend before it changes- implying that possibly the biggest trading profits from the short side still lie ahead.

But I just wanted to express my view, fwiw, about this age old argument, about the value of these technical tools-sentiment and divergences, and my view, again, fwiw, on how they should be viewed.

Good trading, D

I couldn't agree with everything you state more........and I have studied every momentum, sentiment and overbought oversold indicators in every chart time available, as well as read what many have said on such indicators, in addition I have taken heed by those who use other methods....like price and volume alone...and find their views convincing as well.....

My own take is, as you say, await changes in momentum..and to that end, I am detecting subtle changes of a bullish nature.......as is often the case, a sudden or perceived exogenous event will act as the catalyst for a break one way or the or the other....say mark to market and other policy changes that lift the pressure off bank stocks....or for a negative catalaystlike imminent troubles in the European namk system...Foreign contry defaults.....or some unforseen positve or negative event.....then again, the market may move in either direction without an apparent reason or contrary to what one would expect given the news of the day...(like it did when WW2 ended and the market went down.....or may go up this time on a GM bankruptcy.) Whatever which way the market goes, the news media will ascribe the events of the day as the catalyst.)

My own view, is let the market decide where it's headed, but monitor those sensitive indicators, like the VIX to point the way...and as of right now, a break of last weeks high on the VIX, around52, and especially the 100 day moving average and downtrend line from the OCT Highs will indicate more panic to ensue....and conversly, a break to the downside penetrating the uptrend will provide an all clear, if only temporary...........that 100 day MA is right at 53.25..which also was the last recent high........................

[Rogerdodger]

What relevance do high tide marks have when the tsunami hits?

[IYB]

Isn't it possible for weekly momentum to give a "divergent buy signal" if the SPX trades in a sideways down pattern for 3 or 4 weeks only to sell off? It sounds unusual, but that's basically what happened in Oct. last year - a weekly low around the 10th, big price swings for 3 weeks, then the market tanked into the Nov. 21st I.T. low.

So wrt the weekly momentum divergence(s), would you need to see only 1 higher low to generate a buy signal? Stated differently, what kind of weekly price action would trigger a strong enough divergence to buy for an I.T. trend change? Appreciate your thoughts.

Thanks Uno. I really appreciate your work here. It's been supurb, and very helpful to me. And your trading has been an inspiration!

The way I would answer that would be to say that how much of a divergence is "needed" would depend on context. Generally speaking, the stronger the downstrend the bigger the set up needed to reverse it. Just like with sentiment, where, for example, in a strong bull market perhaps a VIX of 20 or 25 would signal a good trading bottom, but those readings mean nothing in a bear market, so it is, I believe, with divergences. So similarly, in a strong market a small divergence may be enough to signal a trading low, but in the most powerful decline perhaps in a century, we need much bigger divergences to signal a meaningful bottom.

The divergences now are, by my observation, the most universal and pronounced that I can remember seeing, even looking back over historical records. So as far as I'm concerned, rightly or wrongly, I'll buy the next momentum trend change aggressively.

Continued good trading, D

[tomterrific14]

IYB,

That's good advice well stated.

As someone who looks at sentiment but claims ignorance toward momentum (what kind of technical analyst am I?!), I wonder if momentum divergences on the SPX weekly & monthly charts can be fairly interpreted since price keeps making lower lows (which you addressed), but also because the present I.T. downtrend has not existed for as long as the one from early August to late Nov. '08 (I count 15 weeks then versus the present 9).

Isn't it possible for weekly momentum to give a "divergent buy signal" if the SPX trades in a sideways down pattern for 3 or 4 weeks only to sell off? It sounds unusual, but that's basically what happened in Oct. last year - a weekly low around the 10th, big price swings for 3 weeks, then the market tanked into the Nov. 21st I.T. low.

So wrt the weekly momentum divergence(s), would you need to see only 1 higher low to generate a buy signal? Stated differently, what kind of weekly price action would trigger a strong enough divergence to buy for an I.T. trend change? Appreciate your thoughts.

If I may respond to your question as to what weekly price action might trigger a divergence to buyfor an IT trend change, One that comes to mind is the succesion of lower highs in the Weekly New lows at each new weekly price low....though , admittedly that divercence doesn't preclude new lows ahead before an IT trend change...but it is a hint of the diminishing of selling pressure......that succession of lower highs of New Lows is also evident on the daily data with each new low in the price averages.......the longer these divergences occur, the greater the countertrend rally will be, as the sellers will have exhausted themselves..............as important as momentum and sentiment tools are I feel, the more success is found using simple price, volume and trendline tools when the Primary, IT and Short Term trends are in gear in one direction of the other...that said, there are profitable countertrend moves if identified in their early stages...problem is, one's hand gets bloodied trying to catch that proverbial knife more often than not....disclosure, I am long at current levels in BGU and FAS...and biting my nails, lol..............

[tomterrific14]

Thanks for your thoughts IYB. But the amount of bearishness doesn't look so scary or record making here.
http://www.market-ha...ntelligence.htm

Yes, there are some sentiment gauges that aren't at extreme levels of fear one would expect at an IT ot long term bottom....another I saw recently that gives me pause on a bullish outlook is the latest COT data that someone here posted a chart of which indicated record shorting by commercials and traders and record buying my small speculators......given the not as yet high put.call ratio, I would only opine a small short rally may occur...........

[Rogerdodger]

Don, I am conflicted by the high readings. I'm looking for a change but it sure seems like a volume climax needs to be seen... or else forgedaboudit.

[IYB]

Don, I am conflicted by the high readings.
I'm looking for a change but it sure seems like a volume climax needs to be seen... or else forgedaboudit.

I agree Roger, and that's what I meant when I said that perhaps the most profitable part of the decline (for short sellers) yet lies ahead of us. But I'll let the market tell it's story any way it want to...