Negative Divergences Often Warn of Impending Declines: Bitcoin Highlighted…. Is Gold Next?
OTC:GBTC
GC1!
BTCUSD
The CMT Association is proud to publish this guest post from Louise Yamada CMT. Louise was a Managing Director and Head of Technical Research for Smith Barney (Citigroup), and while there, was a perennial leader in the Institutional Investor poll and the top-ranked market technician in 2001, 2002, 2003 and 2004. Louise was the 2016 recipient of the CMT Association’s Lifetime Achievement Award.
In these examples we use the moving average convergence divergence (MACD) indicator to illustrate the concept of divergence, to forensically evaluate Bitcoin and to make some forward looking observations on the gold market.
Divergences:
• Negative momentum divergences often warn of impending price consolidations or declines.
• Divergence forms as price moves to a new high while the oscillator fails at a lower high, creating a negative divergence between the oscillator and price.
• Divergences of this type suggest that the underlying momentum may be waning.
Divergences carry different implications depending upon their time frame.
• Daily perspective divergences suggest either a consolidation, or a pullback in an ongoing uptrend.
• Weekly perspective divergences suggest a more sustained consolidation or even a reversal of trend, particularly if important support is violated.
• Monthly divergences have the potential to result in a more sustained decline or even to reverse an uptrend.
MACD sell signals give validity to divergences.
• Monthly signals have much more weight than weekly and daily.
• Monthly divergences don’t always occur prior to monthly MACD sell signals
• But when a sell signal does occur it offers a structural warning.
Graystone Bitcoin Trust (GBTC) Weekly:
• The March 2021 high (A) was followed by a roughly equal price high (B). However, the MACD momentum peaked at a significantly lower high (Line A1-B1), forming a classic divergence that suggested that upward momentum was fading.
• At point C, the weekly MACD moved onto a sell signal (the fast moving average crossed below the slower moving average) strongly suggesting that positions should be either lightened or sold.
• After the sell signal was generated, price declined from 50 to 24.
• A weekly MACD buy signal was then generated at point D. The subsequent rally carried price near the prior high.
• The failure of the MACD to match its prior high warned of potential weakness.
• The MACD generated another sell signal at point E, suggesting lightening or selling positions. Price offered another decline from 50 to 24.
• After a multi-week consolidation in March-April 2022, price broke below the support @Uncle_DU (S1-S2).
• MACD continues to decline, suggesting that the price decline may not be over, notwithstanding interim rallies.
• Before considering a new long, evidence of stabilization at a low and the gradual reversal of the daily, weekly and eventually, monthly MACDs would be required.
Grayscale Bitcoin Trust (GBTC) Daily
• On the daily perspective chart that there is a divergence from price (A-B) and the MACD (C-D)
• The divergence warned of the possibility of bearish developments spreading to the weekly and monthly.
Graystone Bitcoin Trust (GBTC) Monthly:
• The monthly chart also shows a divergence at points MD1 and MD2 and on the histogram at MD3 and MD4.
• At the second price high (B), MACD hadn’t yet generated a sell signal, but it was beginning to flatten and roll over.
• One can also see the falling histogram, as the MACD narrows (blue arrow), and the divergence progressed, until it finally generated a clear sell.
• Price lingered above the support at 24 (S2) for several months providing ample time to adjust positions before the May 2022 price breakdown.
Momentum is still declining, suggesting that it’s too soon to consider re-entry, notwithstanding interim rallies, which can carry into resistance, formerly support.
Graystone Bitcoin Trust (GBTC) relative to SPX Weekly:
• One can also note a similar warning in the weekly Relative Strength (RS) negative divergence.
• In this case the RS for BITCOIN/SPX was also suggesting a change from a period of relative overperformance to one of relative underperformance.
Is Gold Next?
Gold is displaying many of the same long term MACD warning behaviors evident in the GBTC chart.
COMEX Gold Daily:
• Despite the May 2020 (R1) and 2022 (R2) price peaks being roughly equal, the MACD (R3 & R4) peaked at a much lower level.
• A MACD Sell signal occurred after the 2020 peak (R3), alerting to the possible price decline, which eventually carried to the March 2021 low near 1,700 (S1).
• The lower March 2022 MACD peak (R4) also registered a sell signal, suggesting one might lighten positions.
COMEX Gold Monthly:
• There is a monthly multi-year MACD negative divergence between the 2012 (R1) and 2022 (R2) price peaks.
• In 2012, the monthly MACD structural sell signal (R3) was very effective as price collapsed toward 1,100 on the sell signal.
• In March 2022, the MACD, registered another major monthly sell (R4), and then subsequently rallied to test the high (R2) without generating a new buy signal (A), a sign of weakness.
• The MACD has remained negative and appears poised to perhaps continue down.
• This suggests that Gold may be in danger of a potentially large decline, especially if support at 1,700 is broken.
• Such a breach could easily find support at the breakout level from the 2013 to 2019 basing pattern at 1400.
• 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.
Louise Yamada CMT
LYAdvisors LLC
OTC:GBTC
GC1!
BTCUSD
The CMT Association is proud to publish this guest post from Louise Yamada CMT. Louise was a Managing Director and Head of Technical Research for Smith Barney (Citigroup), and while there, was a perennial leader in the Institutional Investor poll and the top-ranked market technician in 2001, 2002, 2003 and 2004. Louise was the 2016 recipient of the CMT Association’s Lifetime Achievement Award.
In these examples we use the moving average convergence divergence (MACD) indicator to illustrate the concept of divergence, to forensically evaluate Bitcoin and to make some forward looking observations on the gold market.
Divergences:
• Negative momentum divergences often warn of impending price consolidations or declines.
• Divergence forms as price moves to a new high while the oscillator fails at a lower high, creating a negative divergence between the oscillator and price.
• Divergences of this type suggest that the underlying momentum may be waning.
Divergences carry different implications depending upon their time frame.
• Daily perspective divergences suggest either a consolidation, or a pullback in an ongoing uptrend.
• Weekly perspective divergences suggest a more sustained consolidation or even a reversal of trend, particularly if important support is violated.
• Monthly divergences have the potential to result in a more sustained decline or even to reverse an uptrend.
MACD sell signals give validity to divergences.
• Monthly signals have much more weight than weekly and daily.
• Monthly divergences don’t always occur prior to monthly MACD sell signals
• But when a sell signal does occur it offers a structural warning.
Graystone Bitcoin Trust (GBTC) Weekly:
• The March 2021 high (A) was followed by a roughly equal price high (B). However, the MACD momentum peaked at a significantly lower high (Line A1-B1), forming a classic divergence that suggested that upward momentum was fading.
• At point C, the weekly MACD moved onto a sell signal (the fast moving average crossed below the slower moving average) strongly suggesting that positions should be either lightened or sold.
• After the sell signal was generated, price declined from 50 to 24.
• A weekly MACD buy signal was then generated at point D. The subsequent rally carried price near the prior high.
• The failure of the MACD to match its prior high warned of potential weakness.
• The MACD generated another sell signal at point E, suggesting lightening or selling positions. Price offered another decline from 50 to 24.
• After a multi-week consolidation in March-April 2022, price broke below the support @Uncle_DU (S1-S2).
• MACD continues to decline, suggesting that the price decline may not be over, notwithstanding interim rallies.
• Before considering a new long, evidence of stabilization at a low and the gradual reversal of the daily, weekly and eventually, monthly MACDs would be required.
Grayscale Bitcoin Trust (GBTC) Daily
• On the daily perspective chart that there is a divergence from price (A-B) and the MACD (C-D)
• The divergence warned of the possibility of bearish developments spreading to the weekly and monthly.
Graystone Bitcoin Trust (GBTC) Monthly:
• The monthly chart also shows a divergence at points MD1 and MD2 and on the histogram at MD3 and MD4.
• At the second price high (B), MACD hadn’t yet generated a sell signal, but it was beginning to flatten and roll over.
• One can also see the falling histogram, as the MACD narrows (blue arrow), and the divergence progressed, until it finally generated a clear sell.
• Price lingered above the support at 24 (S2) for several months providing ample time to adjust positions before the May 2022 price breakdown.
Momentum is still declining, suggesting that it’s too soon to consider re-entry, notwithstanding interim rallies, which can carry into resistance, formerly support.
Graystone Bitcoin Trust (GBTC) relative to SPX Weekly:
• One can also note a similar warning in the weekly Relative Strength (RS) negative divergence.
• In this case the RS for BITCOIN/SPX was also suggesting a change from a period of relative overperformance to one of relative underperformance.
Is Gold Next?
Gold is displaying many of the same long term MACD warning behaviors evident in the GBTC chart.
COMEX Gold Daily:
• Despite the May 2020 (R1) and 2022 (R2) price peaks being roughly equal, the MACD (R3 & R4) peaked at a much lower level.
• A MACD Sell signal occurred after the 2020 peak (R3), alerting to the possible price decline, which eventually carried to the March 2021 low near 1,700 (S1).
• The lower March 2022 MACD peak (R4) also registered a sell signal, suggesting one might lighten positions.
COMEX Gold Monthly:
• There is a monthly multi-year MACD negative divergence between the 2012 (R1) and 2022 (R2) price peaks.
• In 2012, the monthly MACD structural sell signal (R3) was very effective as price collapsed toward 1,100 on the sell signal.
• In March 2022, the MACD, registered another major monthly sell (R4), and then subsequently rallied to test the high (R2) without generating a new buy signal (A), a sign of weakness.
• The MACD has remained negative and appears poised to perhaps continue down.
• This suggests that Gold may be in danger of a potentially large decline, especially if support at 1,700 is broken.
• Such a breach could easily find support at the breakout level from the 2013 to 2019 basing pattern at 1400.
• 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.
Louise Yamada CMT
LYAdvisors LLC
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
