Samwise Quick Reference Handbook
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Hi Sam,
Wanted to pick your brain on the importance and reliability of these negative divergence cycles on QQQ.
Few questions.
Question #1: Do these negative divergence cycles tend to happen mostly near intermediate topping areas?
Question #2: How much weight do we put in them if they happen beginning vs. middle vs. end of intermediate term rallies?
Question #3: Are negative divergence cycles useful when analyzing individual stocks? I’m assuming the answer here is yes, mainly due the correlation of markets, but unclear if things change significantly due to volatility within individual stocks.
Question #4: Based on your experience, how much confidence can / should we have with the expected result of these negative divergence cycles?
Question #5: Do positive divergence cycles hold any weight in our analysis?
Thanks! 🙂
If you’d like, I can also ask these questions in the “Ask Sam” section so your answer isn’t buried in this Daily Briefing.
Q1: They happen all over the place. I’ve posted the chart before. It’s very random. Sometimes you get the QQQ losing emerging just as it clips overbought and then immediately sells off. Other time, when the momentum is strong and it pushes deeply overbought, it’s not a top. It must go through a full cycle of moving higher as momentum drops. That’s the default rule actually. Expect anytime there’s high momentum for there to be divergence first. It’s supposed to be the rule in both direction. But on oversold, I far more often see the market bottom immediately than go through negative divergence.
Q2: The when of it has no bearing on anything. If it happens early versus late, it’s still largely the same process. The only difference is when they occur during corrections. During corrections, overbought tends to lead to an immediate top as you saw in Feb – March.
Q3. Yes. It’s a general technical indicator. It applies to all assets that can be charted. If market participants are charting it, then it’s relevant for sure. What makes most of this stuff work is that it’s self-fulfilling. It works because people expect it to work and then invest on it. It’s the stock market’s version of Schrödinger’s cat.
Q4. I’ve posted the chart before. It’s very consistent. but better when taken together with other indicators. For example, when the market trading in an organized fashion, we often post it together with the segmented rally analysis. Often the market rallies 8-10% before reaching deeply overbought. The two indicators often happen together.
Q5. Only if we’re making trades on them. For example, if we get long off of oversold in a near-term trade, we can use the cycle as a way to exit those trades. Short-term trading portfolio, it’s relevant.
See attached chart image. It shows the cycles. Note how sometimes you get a peak on overbought. But in most cases, overbought occurs prior to further upside ahead of a sharp pull-back. There’s a delay period.
I think that’s it, this was the top. SPY and DIA deflated at the close, QQQ deflated only partially but wont resist if the other break.
Since 2021 QQQ usually sustain RSI(daily) >=70 for 6 days at most, with only one exception of 10 days. Today was day 6.
I think tomorrow will have a 4%+ pullback.