Comments on: Trading Divergences In Bear Markets

By: rsotc

rsotc — Wed, 19 Dec 2018 18:24:04 +0000

On the PPO, I draw my divergence lines for positive divergences just below the lowest points before the indicator turned back up. As the PPO line (12,26) is “faster” than it’s moving average (9ema,aka signal line) it will usually be the lower of the two on the troughs. Most importantly, positive (bullish) divergence exists when a security is making lower lows while the indicators are making higher lows. This might not be found in the textbooks but I consider the divergence “confirmed” once the PPO or MACD makes a bullish crossover following the 2nd, higher low as that means the lower low was effective put in place. Otherwise, the PPO or MACD could continue falling & negate the divergence by moving down below the previous low.
Of course, there is no guarantee that by putting in a higher low that the PPO or MACD won’t suddenly turn back down & take out the divergence, as sometimes that will happen but more often than not it does not.

By: Drew

Drew — Wed, 19 Dec 2018 16:07:49 +0000

Hi Randy, Quick question: when you are looking at the divergences of the indicators EMA & PPO, which one do you put the divergent line at? I.e. for XLF, the EMA(9) has positive divergence but PPO(12, 26) undercuts the previous low slightly, so it has negative divergence. Is the indication of reversal still valid?

By: rsotc

rsotc — Tue, 18 Dec 2018 21:44:03 +0000

In reply to Flanny3.

Typically, the small caps will rise more than large caps in a bull market & fall more during a bear market. That is because small companies have a faster growth rate than large caps but when things turn south, they fall more because they are not as fundamentally sound & well capitalized as large caps, generally speaking. IWM outperformed SPY by a wide margin since the start of the bull market in 2009 & will likely continue to underperform during this or the next bear market.
As far as whether to go long or short small caps vs. large caps, that depends on several factors but mainly what the charts are indicating. At this time, my expectation is that small caps are likely to outperform SPY from current levels but my convictions are very high & my two favored index ETFs for the next long swing trade at this time are QQQ & IWM although MDY will probably rally roughly in line with those two.

By: Flanny3

Flanny3 — Tue, 18 Dec 2018 17:03:59 +0000

Randy
do u find correlation in the general indices during corrections in terms of % change? smallies are down 21% vs. 10% sp for example, typical that all indices meet similar % corrections (i.e. smallies closer to bottom, other indices need to catch up)? Part 2. as u reallocate long, do u favor the smallies in your equity funds as u reinvest? thanks!