Tuesday, April 9, 2013

When You Come To a Divergence in the Road...

Back in the beginning of the year, we had initially cautioned that the yen was unwinding in such a fashion that traders should qualify the large positive RSI divergence as suspect, although the set-up typically results in powerful countertrend retracement moves. In our experience, the structure and momentum profile that the yen was exhibiting still had room to run, replicate and lure traders into believing a reversal was imminent. We have found - and have the scars to prove it, that pronounced positive RSI divergences that fail to gain traction in the short-term often have considerable inertia to sterilize mean reversion strategies over time. In these occasions, the positive divergence will become present on the hourly timescale, move through to the daily, the weekly and eventually the monthly timeframe. 

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This same dynamic has been running over the last two years through our comparative of the precious metals miners to the last large value trap of the previous cycle - the financials. Below is an update (from last month, see Here) of that long-term comparative that describes how a derivative sector (BKX & XAU) capitulates - relative to its eroding and denominating backdrop (SPX & Gold). 
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As shown in the long-term series with the XAU gold and silver index, as well as our shorter-term comparative with GDX - the ratio expression should begin to firm over the next week before turning down again into May. This approximate timeframe is also pointed to with the 92' Nikkei/Silver series (see Here), which would see momentum in silver firm over the next week before taking a few stairs lower into May. 
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Not surprisingly, the yen has followed a similar divergent profile and appears to be on the cusp of changing courses. While we have been reticent to embrace the set-up, we would agree with the great philosopher Yogi here, "when you come to a divergence (fork) in the road - take it". 
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology