Thursday Update November 17, 2005
The Internal Affair
by David Yu
Even though we know the internal strength of the market has deteriorated, the market just keeps chugging along.
The AD Line (Advance-Decline Issues Line) gauges the internal strength of the market. In late stage of a bull market or a rally, there's a tendency for this AD Line to start rolling over and diverging from the major market indexes. This is what we're seeing right now on Chart 1. The Nasdaq and the Nasdaq AD Line were coming down the pipe together from the beginning of August. Then something happened in the second half of October that pulled the Nasdaq away from the falling AD Line.
You can do a little charting on your own by drawing a long-term (more than a year) AD Line against the Nasdaq and see how big the divergence gap looks. Michael Kahn, chief technical analysts for Bridgenews and Barron's, called this a divergence of "epic proportion". And yet, the market just keeps chugging along.
Chart 1
The Value Line Index weekly MACD (Chart 2) also continues to stay in the negative territory while the market rallies. Its reading's currently at -1.8. A negative value such as this indicates the broad market momentum is down. But then, the market keeps chugging along.
Chart 2
And then there's my humble Market Strength MACD (Chart 3) that shows some wild ups and downs of the histogram since the buy signal was issued on 10/25/2005. It went down under 0.05 (5%) a few times and finally fell into the negative territory yesterday. In the past, this normally would've started a bearish trend reversal already. But, the market keeps chugging along.
Chart 3
We know something's going to crack. We know the current rally is not sustainable. However, there are trading opportunities as long as we trade with the trend that's fundamentally sound and find entry opportunity that's technically verified. My recent additions of Silver, Bond Fund, Airline, and REIT, etc. to David's Trade Talk portfolio were my attempts to accomplish just that.
Incidentally, my Market Strength MACD hasn't given sell signal yet because the black trigger line was still up in the positive territory as of yesterday. So, we continue to hold 'em DIA and QQQQ that we bought 3 weeks ago.
We gotta know when to hold 'em, know when to fold 'em, know when to walk away and know when to run...
email: david_3011 @ yahoo.com
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