"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Tuesday, July 8, 2014

Russell 2000 continues to Flash Negative Divergences

Not that it has made the least bit of difference to the continuing price rise over the last year, but each new weekly high in this very risk sensitive index, has come with a lower reading in the RSI. Note that I have smoothed the indicator a bit to weed out a bit of the "roughness". That being said, the RSI reading has not once in the last year, surpassed its high reading made in March 2013 and again in August 2013. Upside momentum is waning but it does not yet seem to matter. The index has relentlessly powered higher.

I do not believe one can call a definitive top in this market until, at the very least, the support level near 1080 might give way on a weekly closing basis. One should however note these negative or bearish divergences and at least exercise some caution.

Traders who are long with large open profits might want to get a bit of downside protection in the form of puts or covered calls on a portion of their positions just in case this index were to finally confirm any of these divergences.

The problem for the bears has been the ultra low interest rate environment. It has essentially made stocks the only game in town as far as obtaining a decent rate of return on invested money. Until that changes, bulls will more than likely continue with their heretofore successful practice of buying dips. Eventually the music will stop but timing that over the last year has been a fool's errand. All a trader/investor can do is to go with the money flow until something changes technically to indicate that the party is over. For now, in spite of the divergence warnings, the good times continue to roll for the bulls.


  1. Watch the reversals and these will provide us with a good guide. A July low at that time could result in a reversal rally into the October time period whereas a high at that time could produce a low in October. Hubert, this is your buddy the Cyclemaster once again; sparks, of course

    1. Ya i had to read that one a few times too and still dont really get it.

    2. So if it tops it will then go down or vice versa. Roger that.

    3. Well if its going to make 26k by oct 1st 2015 it better get going. 9k in 1.4 years is quite the distance to run

  2. Follow fundamental ... there will be no correction for dow ... just a deeeeep crash ... waiting for 90% discount

  3. Dan I've been following some of the momentum stocks and they've taken a decent beating over the past week or so. I sent you an email to catch up - I want to thank you for your lessons on the ADX and +DMI/-DMI. I applied what you've clarified in detail regarding these indicators to an analysis I did on Zillow's stock over the weekend and I nailed it on this recent pullback this week.

    You're right in that the overall trend remains to be in the bulls favor for the indexes, but I wonder how upcoming elections in the Fall may sway markets one way or the other. Middle East tensions also on the rise unfortunately. Notably, Exxon's stock wasn't in the red today, despite the selling in so many other names out there.

    DOW poked its head above 17K, and I suppose many traders were of the impression that the S&P would hit 2000. Not going to rule that out quite yet, but a pullback may be in order first.


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