Monday, December 27, 2010

Negative divergences

The S&P and Nasdaq continue to make new highs but as can be seen in the charts below, the MACD , having peaked in November, refuses to make new highs with the broader indices. 

This negative divergence has been developing since November and signals a correction around the corner. If you are long, do remember to take some profits here. As short term traders, we shouldn't worry about the tax implications of taking profits at the year end. Its been a great year and we must strive to make it end that way. If you are short, do remember that topping out is generally a long process, specially in case of markets as resilient as these. Last week, I had posted about the negative divergence with the Adavance-Decline Line, so signs of this rally being unhealthy are cropping up more frequently now. 

If you wanna short here, do not take entire position at once and wait for confirmation of a correction before taking full positions. Remember, calling tops and bottoms is a fool's game. Its great for the ego if you are proved right but in the long run, it's harmful for your trading account. 

And if you are long, remember to be tight and disciplined with your stops. As short term traders, we don't have to catch the entire part of the rally, just the meaty part of it. Make that the easy part of it, and it seems like the easy part is over.

Take care and good luck!

No comments: