Dangerous Divergence

Larry Pesavento: ‘Pattern recognition is a viable method of determining the direction of the market within limits. It is far from an exact science but it does put the odds heavily in the favor of the pattern recognition trader. The work from Dr. Andrew Lo at the Massachusetts Institute of Technology proved this validity without a shadow of a doubt that eventually led to his book “The Non-Random Walk Down Wall Street“.¬†

In addition to pattern recognition there are other tools that the technician can use to help determine unusual trading opportunities. It is my opinion, we are at one of these significant points in the stock market. There are two charts accompanying this dialogue that deserve your attention. The first chart shows of the divergence between the NASDAQ market and the New York Stock Exchange index at the top of the market in 2007.

In 2007, the NASDAQ was making substantially higher highs whereas the New York Stock Exchange index was making a classical double top. Presently, we have a similar situation with the NASDAQ screaming into new high ground whereas the New York Stock Exchange index is barely making a 786 retracement of last year’s high. I will leave it up to the readers to determine if this is worthy of your attention, but patterns do repeat and it’s something to keep in the back of your mind.

So many things are coming together at present that it is hard to believe that the market could go higher from these current levels.¬† But the one thing we have learned from decades of experience is that market trends can last longer than your equity if you do not plan for risk and watch out for the safety of your capital.’