Welcome back to Technically Speaking.
Consciously or unconsciously, we are conditioned to have certain opinions. They may not be our own to begin with, but they form a part of our decision making. While all ideas have their place, the market is particularly unforgiving. The market doesn’t care what you think should play out for you to benefit, it unfolds independent of wants and needs.
For example, we’re all looking at the same chart. Unless of course we use different types of charts altogether like point and figure or kagi, etc. For the most part we’re looking at similar forms of the chart. Take the Dollar Index for instance. The price had ben testing the level of 103.50 since 2017. In June this year, we got a breakout and follow through in price. Its trading close to 108 now.
But the question is, how many people who could participate in that trade, actually did? With inflation catching up, crude oil making a base and DXY rallying, the average market participant can see the adverse impact of these variables on stocks and commodities. But rather than switching into a Dollar trade, wishful thinking takes precedence. Somewhere deep down there is hope that the DXY will pause and that bonds will catch a bid again and that the stocks will get back on track to moving higher. This here is the inherent bias formed due to unconscious conditioning. Dollar going up – bad. Dollar going down – good. When it really should be about following the trend and taking positions accordingly.
Similarly, take a look at the Chinese market. The Shanghai Composite has been moving higher for the last two months, even as other global indices continue to correct. Chinese Internet stocks (KWEB) as well as large cap stocks (FXI) have been doing well too. But how many market participants bought into that move? Not many, is my guess. There are ETFs to benefit from too, you know?
The point here is that there are opportunities that are missed because of the inherent biases we hold. And these are opportunities lost with a sizable opportunity cost. But the end goal of being a market technician is just that, shedding biases. And boy, that’s not easy! I’ve been a part of the chart world for 5 years now, and there are times when I catch myself with these inherent biases as well.
What are some of the biases that you faced in your journey? Share your thoughts with us at: firstname.lastname@example.org.
Until next time,
Rashmi Bhatnagar, CMT
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Negative divergences, occurring in a variety of indicators, often warn of impending price consolidations / declines. There are different implications with short- term, intermediate- term or longer-term (more structural) divergences observed versus price action in an uptrending stock, commodity, index, etc.
A divergence occurs when price moves to a new reaction high but the indicator does not, rather failing at a lower high, creating a negative divergence to price, suggesting the momentum is waning.
Referencing here the MACD (moving average convergence divergence) indicator as an example, short-term (daily) divergences can indicate the potential for either a period of consolidation, or of a short-term pull back in an ongoing uptrend. A weekly divergence might suggest a more sustained consolidation / pullback, and even a reversal of trend, particularly if support is violated, offering an opportunity to lighten positions.
The monthly (more structural) divergences generally cover an extended period of time and should be taken more seriously for the potential of a more sustained decline; even an eventual end to an uptrend. These can offer a warning / opportunity to continue lightening / selling positions.
The event of a Sell signal in the MACD (the upper line crossing below the lower line), or a broken critical price support level, offer technical viability of the divergence. Monthly divergences need not always occur, but a monthly MACD Sell signal, even without a divergence, offers a more structural warning to sell.
Is GOLD Next?
Recently, we have been questioning the somewhat similar behavior of GOLD:
The May 2020 price high achieving 2,000, versus the 2022 price peaks also achieving 2,000, as well as the relationship between the two 2022 price peaks with regard to their momentum readings.
The daily MACD divergence to GOLD price is quite visible (Fig. F-5), by the time the 2022 price rallies to 2,000, equating to the 2020 price high, but with the 2022 MACD at a much lower level (see aqua line, lower panel) than that of
- (Note: A MACD Sell signal occurred after the 2020 peak, alerting to the possible price decline, which eventually carried to the March 2021 low near 1,700.)
The lower March 2022 MACD peak also registered a March Sell signal, suggesting one might lighten positions.
Fig. F-5 Gold (GOLDS) (Top) and MACD (Bottom) (Daily)
Source: Bloomberg and LY Advisors
In addition to the daily MACD wide divergence between the 2020 and 2022 price rally peaks, there is also a shorter-term negative MACD divergence between the 2 peaks in the 2022 March and April rallies to 2,000 (declining red arrow, lower panel).
This divergence followed the March 2022 MACD Sell signal, and barely recognized the April price rally (declining red arrow, lower panel). The ultimate price decline broke the support at 1,900 (flat aqua line, top panel), broke the short-term uptrend, and slipped below 1,800 before rebounding slightly.
Fig. F-6 Gold (GOLDS) (Top) and MACD (Bottom) (Monthly)
Source: Bloomberg and LY Advisors
The monthly profile (Fig. F-6) depicts a multi-year MACD negative divergence to price (see declining arrow, lower panel) from as far back as the 2012 price peak near 2,000, versus the minimally higher 2022 price peak.
(In 2012, the monthly MACD Sell offered protection from the price collapse toward 1,100, had one followed that structural Sell signal.)
In March 2022, the MACD, registered another major monthly Sell and barely rallied on the secondary 2022 price peak back to 2,000; the MACD now remaining negative and poised to perhaps continue down.
This suggests technically, that Gold may be in danger of a potentially larger decline ahead, especially if support at 1,700 is broken. Such a breach could bring next support at 1,400 into view (horizontal red line) … returning to the breakout level from the 2013 to 2019 basing pattern (see saucer).
It is possible, however, that although GOLD has broken out in many other currencies, the extraordinary current strength in the US dollar may be contributing to the GOLD disappointment.