Sunday, November 1, 2009

Divergences, Divergences

I see that the blogosphere has latched on to the momentum divergences as a sign the market is going to crash soon.

Now maybe it will and maybe it won't, no one knows for sure. What I do know is that a momentum divergence is certainly no guarantee of anything.

Folk's all charts are nothing more than a record of the past. The past is no guarantee of the future. That's the reason it's so hard to get rich with technical analysis alone. Sometimes it works and sometimes it doesn't.

There's nothing that says a momentum divergence can't all of a sudden accelerate and wipeout the divergence.

Take a look at the S&P back in `03. At the time we were rallying out of a severe bear market bottom based on no fundamental base other than massive liquidity injections by the Fed. Sound familiar?

In theory this divergence should have led to the market rolling over into a continuation of the bear market. I know the vast majority of bears were expecting this very thing at the time, and betting heavily on that outcome I might add.

Now as we all know, things didn't play out exactly like the bears and technicians were planning. The Fed's oceans of liquidity were stronger than the charts.

We are now in a very similar situation. Except this time Bernanke has staked everything on his printing presses. He's obviously willing to destroy the dollar in his attempt to defeat the forces of deflation and the laws of economics. The US refuses to suffer the consequences from the massive excesses of the past two decades. Instead we just keep going deeper in debt trying to mask the growing cancer imbedded in our financial system.

So as long as Bernanke is willing to keep churning out liquidity one should be very wary about technical indicators, especially ones that position you short.

I guarantee a couple of trillion dollars is going to be a lot more powerful than any chart pattern or technical indicator.