Samwise Model Portfolios
The portfolios below are separated by launch dates. Each portfolio is entirely independent and has no bearing on any other model portfolio. We launch entirely new portfolios during each market correction as an illustrative tool for new subscribers who weren't present during...
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Hey Sam – I realized your intermediate outlook on the market is dependent heavily on historical trend (average days of gain before pull back, size of pull back and days, etc.). And your short term read on the market focuses on RSI that signifies overbought or oversold. My question is – what is your take on the negative divergence that has been going on for months on the QQQ? Do you see this as a risk factor that, at some point, will drag the market down?
Hi Michael — so the overall negative divergence we’re seeing in the QQQ is imbedded in the three push-up pattern I’ve been outing. The set-up and consequences are basically the same.
They both indicate that the overall momentum has slowed dramatically on the NASDAQ-100. It’s a big concern for sure.
But I guess from our perspective, we’d welcome a correction at this point. And that’s because we have a lot of new subs who want to see the process unfold and we simply can’t do that until we get a correction.
Corrections are our bread and butter. So I’d be really happy to see one soon. But to answer your question, everything that I say with respect to the three push-up pattern applies to negative divergence. It’s the same core arguments. The three push up or three push down emerges as a symptom of negative divergence generally. Here are some definitions:
In a Three Push Pattern, a stock makes three consecutive peaks, each higher than the last, but with decreasing momentum on each push. This pattern suggests that the buying pressure is waning, and a reversal may be imminent, as sellers could start to dominate.
Negative Divergence occurs when the price reaches new highs, but an accompanying indicator, like the RSI or MACD, fails to make corresponding highs. This divergence between price action and momentum signals weakening strength in the trend and a likely reversal.
The three push up pattern only appears in negative distance and hence the arguments are the same: the three push-up signals exhaustion in the current trend and increase the probability of a reversal. Traders often view negative divergence and three push up as warnings to prepare for potential price declines, as both patterns reflect diminishing buying power and weakening upward momentum.
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That being said, here’s what I’ve found to be the case when it comes to negative divergence. I’ve found that negative divergence loses reliability the further out you go in time. It’s highly reliable in the ultra near-term — like during intraday trading on the 1 minute or 5 minute chart — and then starts to diminish as an indicator once you move out to the hourly or daily chart. It’s still reliable as an indicator, but as we go out to weeks and months, it has less of an impact.
At least that has been my experience with negative divergence.
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One last thing worth noting when it comes to negative divergence is this. We use it as a key indicator on the hourly chart for the QQQ. When the QQQ pushes overbought, two things often occur. First, we get a delay period where the QQQ makes new highs. That delay period is actually negative divergence taking place. Second, we get a hard peak followed by a sell-off.
Here’s our negative divergence chart. I just try not to use the phrase “negative divergence” because technicals have such a bad wrap. Especially with investors. And so I try to avoid using such terminology when possible.
This is really helpful. Thanks for the lengthy reply!
Damn. I literally deleted that paragraph like 7-8 times last night. It’s standard example text in the block editor. The annoying thing is that it won’t go away because the description tab. So every time I reuse that block for the outlook, it comes back. Thanks for the heads up. It’s really appreciated.