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Can You Afford to Ignore This Divergence, Now?

May 21, 2015

The last time I mentioned this divergence was in November 2007 and it did flash future turbulence, later to be known (and still is) as The Great Recession. This 100 year old indicator can’t be used for day to day market movements but it can define turning points on the macroeconomic level.

Are things different today vs 2007? Yes and No.

While this divergence is technically the same, there are some abnormalities in the stock markets today. And the top of the list is “role of central banks” around the world and various “plunge protection team(s)”. The “unlimited” supply of money, in the form of QEs markets, does act like an inherent PUT option which might also explain why markets haven’t suffered even a 10% pullback for quite some time now. In fact, this is one of the longest Bull runs in the entire history of US stock markets.

Still, even after factoring those differences, we can’t ignore this glaring divergence between Dow Jones Industrial and Dow Transports. In fact, it is so vivid that yesterday after Fed announcement, Dow briefly scaled to all time high, while Dow transport was slipping almost 2%!!!

Dow Theory Latest

The price movement analysis based on these two indices i.e. Dow Jones Industrial and Dow Transports is called The Dow Theory.

There have been other instances of Dow Industrial and Dow Trasnports divergence during the past few years. However, one that clearly stands out is Sep/Oct 2013 when Dow Jones was making a higher high but Dow kept on drifting lower i.e. non-confirmation and we all can see what happened in next few months.

So what does this mean? what do I need to do? Should I sell my stocks and convert to cash?

As a direct result of learning under him, $7000 profit during the last three months alone . My trading skills as well as results have improved significantly.

Anna, Singapore

0% to 50% with a quite high success rate. As a direct result of OP’s strategies I have made a positive cash flow of $34,000/- within a short period of time.

J, Spain

..16 years witnessing my capital being managed by different brokers....Option Pundit is well tuned with the market and exhibit option trading techniques far more sophisticated than my previous options brokers...

Luis González, USA

I am NOT suggesting that there is market downtrun right here even though I think we have at least short term peak here (SPX 2140+/-). However, As someone who has been trading these abnormal markets, you have to keep in mind all the flashing red signs so you can PREPARE your plans. No one can pick the top or the bottom. At the same time, one may have to keep dancing as long as music is being played too…but…dance as close to exit door as possible. The exit door is getting smaller day after day.

Here is a bit of Dow Thoery history (source- Wikipedia) – The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851–1902), journalist, founder and first editor of The Wall Street Journal and co-founder of Dow Jones and Company. Following Dow’s death, William Peter Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented Dow theory, based on Dow’s editorials. Dow himself never used the term Dow theory nor presented it as a trading system.

Profitable Trading, OP

3 Comments

  • Sharada says:

    Hi
    kindly notify me on your next upcoming workshop & also lwt me know how much do I need to join op group.

    Thanks

  • kanishk, ken, nathan says:

    hi; i wd like to sign up for yr options recommendations service; if u have a discount sale or promottion going on nowadayslet me know; some questions–
    1. how much isyr normal monthly subscription?
    2. do u trade only spreads , etc which aim for low profit % or simple calls /puts that aim for high % returns or both? because im more interested in high risk high reward trades
    3. since im based in california and not able to trade during market hours EST, can i still do yr trades in after market hours a few hours after the alerts come out?

  • OptionPundit says:

    @Sharada,

    We’ll let you know.

    @Kanishk,
    1. Subscription details are listed here ($124.95 monthly based on yearly subscription) >> http://opn.optionpundit.com/
    2. Trade spreads, simple call and puts too. But majority of trades are focused for achieving our monthly goals of 4-6% per month.
    3. Though it is doable, we suggest that you should have market access.

    Profitable trading, OP

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