I had based my observations on proprietary research that looks for a clustering of negative divergences between price and an oscillator that measures price. I have presented this concept many times over the past year and across various markets. See this article from June 15, 2009 on the 10 year Treasury yield as just one example.
From the December 1 article, I wrote:
"From my vantage point -that is, from my quantitatively driven research - the clustering of negative divergences bars on the weekly charts of several key ETF's should be a concern if you are an equity bull. Why? If we go back in time, a clustering of negative divergences has often been associated with a market top, but not every market top. The ensuing sell off could be moderate in scope lasting several months or it could mark the onset of a much broader and deeper sell off."
"On the other hand, there have been a few times when prices moved higher despite the clustering of negative divergences. When this happened, it appears to represent a blow off top or more rarely (1954 and 1995) part of a sustainable trend."
On how to play the market back on December 1, my suggestion was the following:
"If price closes over the high of the most recent negative divergence bar (on a weekly closing basis), then the market or ETF (under consideration) in all likelihood is going higher. Whether this represents a blow off top or a more sustainable trend is yet to be determined. If prices remain below these negative divergences, then they do, and you look like a genius for selling. But again, if prices do move higher, you have a mechanism for getting back into the market - a weekly close over the high of the negative divergence bar."
"If you sell now and prices do go higher, just look at it as taking out insurance and playing good defense. If you have to buy back later on a close over the negative divergence bar, I would use the low of that bar as a stop loss."
I hope you sold something, anything.
Let's look at our list of ETF's that I have been presenting over the past 2 months; these ETF's made it to this list because they had a clustering of negative divergence bars. See table 1. Column 1 is the ETF in question; column 2 is the high of the most recent negative divergence bar and it is a weekly close over this value that would suggest much higher prices -possibly a blow off top- for that particular ETF; column 3 is the percentage gain from the high of the negative divergence to highest high (if one was achieved) over the past 6 weeks; column 4 is the current price relative to the high of the negative divergence bar.
Table 1. ETF's/ Cluster Negative Divergences
1) 17 out of the 24 ETF's are currently below the high of the recent negative divergence bar;
2) GLD, MOO, XME, KOL, SLV went above the high of the negative divergence bar by more than 9%; all these moves were parabolic occurring over a short time; for the most part, the gains have diminished in all these issues with the exception of MOO. This kind of price behavior - as the research showed - is consistent with a blow off in these assets. If there was a close above the clustering of negative divergence bars, I designated it a "buy/ hold" which meant the following:
"A 'buy/ hold' signal would be for those ETF's that have already closed above the highs of the recent negative divergence bar on a weekly basis. Because this has happened, there is the possibility that prices could accelerate higher. This trade is for the nimble."
3) FXI never moved above the high of the cluster of negative divergence bars, and it is currently off those highs by 15.11%.
To summarize, the presence of a cluster of negative divergence bars has identified slowing upside momentum in the majority of ETF's on this list. Those ETF's that accelerated higher over the past couple of weeks have essentially given back those gains and appear vulnerable to further downside. As of Thursday, the average loss from this group of ETF's has been (negative) 2%.