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I just saw the ball under that cup, then why is it under this other one!

March 21st, 2006 at 07:37 pm

I don't know why, I used to like giving my money to those guys who would gladly take it for a minute of showmanship. Sometimes I think the market can do its own mysterious disappearing act to profits, if it is not watched carefully enough. The major indexes can be those cups, but often only one of them has the ball underneath when it comes to knowing when to buy or sell.

Market Divergence sounds like a boring topic, but can be a useful tool when it comes to making a buck. In a nutshell, market divergence occurs when the major indexes are performing differently at a given time. For example: recently the Dow, S&P 500 and NYSE recently hit 4 1/2 some new highs, but the NASDAQ was no where close. A more subtle example is that the NYSE has been the best performer of the group. I feel this divergence isimportant because the S&P 500 and the NASDAQ were recently, on more than 1 occasion, at or near their 50 day averages, each time to signal a buy transaction for all of the majors.

Recently I have focused specifically on movements of the S&P 500 to gain an understanding of the short term direction of the market. Then when I thought buying and selling signals presented themselves, I would transact on the NYSE or Russell 2000 because the last two showed more relative strength than the S&P500.

Here is a summary of recent moves I have seen on the S&P 500 and what I thought these meant (starting at the end of 2005):

October 19, Huge buy, (donít miss this one!): Market confirmation for the beginning of this leg of the current bull market. I have not discussed how to find the market bottoms yet.

December 2: Sell on the Roller coaster effect

December 30: Buy, as S&P 500 is near 50 day average and due to low volume selling

January 27: Sell on the roller coaster effect. I have no other real reason except, that February is often a bad month. I admit it I personally got nervous and sold. I have not bought again since, but probably should have: its that trader/investor inner struggle in me.

February 14: Buy, due to return to 50 day avg after falling below briefly.
(NYSE and R2k did not fall below)

February 17 Sell on the roller coaster effect, volume indicates advance is weak.

March 7: buy on the bad news (I can be contrarian!) and the first 3 trading days of the month were up(havenít talked about this one yet) so the rest the month will probably be decent

March 16 sell on roller coaster effect and recent buying volume still not that great.

It is important to always review all of the charts of the major averages to try to find the right trend. In this case, it was divergence with the weaker market giving the buy and sell signals.

Disclosure: I donít always take my own advice, due to time constraints or I just fall out of trader mode, going away from the dark side for while, deciding once again to become an investor.

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