I'm sure you heard the saying 'divergences are the holly grail of trading'. Well, a look at what happened after the crash of 2008 and it definetely sounds or better say, looks true.
There is nothing much that needs explanation, the divergences warn about future market direction. Look how most of the corrections were announced by divergences, and look how most of the corrections started with a candle pattern, more important the covering patterns (engulfings, dark cloud and piercing line, they all cover the previous candle). As I stated in the chart, on the weekly it's harder to get a proper candle pattern, by that I mean the lack of gaps. It's a weekly chart, there aren't big changes over the weekend in market consensus.
Let's concentrate on the latest signal, that is what can make money for us. All around the world there is a selloff, especially in emerging markets and their currencies. The argentian peso lost 17% in a day, turkish lira is at new highs every day, South african rand posts multi anual highs, yen gaining through all its crosses. The bigger markets are also down. There are many reasons for this, which I won't state because I do not have the knowledge to explain them, it is just information taken from various papers and from two fundamental analysts from my country that I trust. The trigger of this selloff was the low Chinese manufacturing PMI, after the release Japan went down strongly two days in a row, I was long the Nikkei, got stopped out. The situation continued in Europe, then in the US. Today, it looks the same, massive selloff everywhere. I'm sure there will be a pause, when I am going to look for an entry to hedge my US market positions.
Looking only at the chart, I need to say that it is important for the week to close like this, with a big red candle, At the time I am writing this, there is a on the hourly chart of the Dow, but it is probably only a sign for a correction. Looking back at the last months, We had sort of a , formed in september-november, by the tappering and the government shutdown debacle. After that, we started rallying again, retesting and then again rally. A very big class A divergence is screaming at us (at least at me) to stop going long and look for shorts. The pattern is on most stocks, but I've been ignoring it, expecting only minor corrections which wouldn't affect my positions. After this week, I'm starting to take it more seriously because we also have an candle after four weeks of indecision. About two weeks ago I expected a small correction on the US market, I posted an ideea where I said that it would be great if we would stop at the first . Well, we did, but I'm not sure about the great part. Things don't look good here, don't look good in Spain, Germany, Japan, Turkey, anywhere aroung the world. Divergences were screaaaaming on every chart you could look at. Well, now the correction started, the question is when will it end?? Today, next week, in a month?? I do not know, but I am very for the short term.