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Increasing Evidence The Stock Market Is Creating An Intermediate Term Bottom - Find Out How To Make Money In This Environment
By Geoff Green | March 19, 2008
Evidence is increasing in the stock market that recent price action could be creating an intermediate bottom that could lead to a tradeable bullish bounce.
Recent strength in several market groups that helped pull prices down last year are displaying increasing relative strength over the recent weeks. These groups include the transports, retailer, homebuilders, small and midcap stocks.
In addition, just about all the short-term indicators I track appear to be creating a positive divergence as the stock market tests the January lows.
A bullish divergence is created when prices create a low and an indicator fails to “confirm” the new low. This type of action is very good at foreshadowing a trend change or bounce, at least for the short-term.
Take a look at the following chart for examples of bullish divergences being created.
If you look at the low created by the RSI line that corresponds to the low in stock prices set in January of this year, you can see that the RSI low point is higher than the lower low in stock prices set on Monday of this week (the arrow on the RSI line). This non-confirmation of the new price low is the bullish divergence.
Second, examine the higher low created by the MACD histogram for the same two price points in S&P 500 chart. You can see here also that the MACD histogram fails to confirm the lower low in prices. This non-confirmation of the price low is also a bullish divergence.
Many other bullish divergences can be viewed in additional indicators. Although price and volume action are the most important indicators of future price action, indicators - especially indicators that are diverging - can help confirm or support conclusions arrived from examination of price and volume.
All these bullish divergences are creating an underlying improvement in the technical situation that could lead to a tradeable bounce that may test the high price mark set in February. This may not be the final low in this bearish market but could easily produce some respectable short-term profits.
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Written by Geoff Green, at http://www.profitable-investing.com Copyright 2008.
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Topics: Daily Commentary, bearish, bullish, price, relative strength, stock market strategy, suckers rally, technical analysis, tradeable bounce |
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April 2nd, 2008 at 9:15 am
[…] bottoms and potential trend changes in the stock market recently. You can view them here Evidence of a Stock Market Bottom, and here, Stock Market Indexes […]