Negative Divergences Abound

Since its not always easier keeping up with the market over a long holiday weekend, I thought to share my weekly “homework”.

Plenty of interesting red flags from my MACD Divergence Detector running on StockFinder®. It found MACD and MACDH negative divergences on SPY, DIA, ISRG, BIDU to name a few. Looking at the chart of SPY below, its clearly not the first negative divergence.

MACD Lines and Histogram do not confirm price action on SPY (click to enlarge)

The other SPY negative divergences kicked off a slight decline, followed by a rally. What’s to say that won’t be the case again?

First off, consider that the markets may very well rebound again. It is, after all, a seasonally strong time of year. I don’t want to make recommendations or predictions here, just share some observations. See Truth About MACD BackTesting Reports for data on the historical back test performance of MACD divergences.

The next observation to share is that breadth and New Highs / New Lows (NH-NL) exhibit extraordinary negative divergences of their own. Here’s a chart with McClellan’s Summation Index to show what I mean. (Note that I didn’t personally run a back test of McClellan’s Summation Index. Tom McClellan told me he did. I wish the strategies of other people who have told me that had performed better in my back tests. Anyway, until I get around to doing the back test myself, I am taking McClellan’s word that the summation index that bears his name is a useful indicator to have in the toolbox.)

Red arrows highlight divergence between SPY (green) and McClellan Summation Index (yellow)

With these kind of negative divergences showing I am certainly not thinking of buying the dip! In fact, negative divergences are a signal to sell long positions in my book.

If you are also standing near the door (so to speak), or working on your own stratgy for cutting losses and taking profits, you may want to take a look at the Exit Strategies series of BackTesting Reports. They show back test results for various kinds of fixed stop losses, trailing stops losses, and profit targets. That stuff isn’t as glamorous as buy signals but if you didn’t make a solid plan for when to sell before you bought, the next best time to think about these things is while the market is up.