Options Trading Strategy: Spotting Bearish Divergence
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Options Trading Strategy: Spotting Bearish Divergence

John F. Carter 12/13/2013

Got a good question here in the ETF class -- that I just went over a long video for the premium video about the spiders. Now there's a huge bearish divergence in the spiders, and to be very careful. We looked at potential down side targets plus what's going on with the YEN and all that kind of stuff.

What about the QQQ?

So the question came up, "Well what about the Qs?" Well, the queues also have a bearish divergence but they've not confirmed yet, OK. So the Qs keep making higher highs, rate of change is not confirming and it had a squeeze. Well, the thing that we need to confirm a potential reversal -- even if it's a short term one -- is two lower closes in a row below the 21 period moving average. You can see that has not happened yet and the Qs have had the strongest index so that makes sense.

However, we've got a situation here where the other markets, the other major indexes are putting in fairly major bearish divergences and the squeeze that was propelling the NASDAQ higher has now run out of momentum. So long story short, even though the Qs do not have a sell signal. So SPY, they have a sell signal, but the QQQ, no sell signal yet...and they may not get one. But that's what we want to watch for. I mean the squeeze here has lost momentum so now the upward trajectory is over. You can see here in the Parabolic SAR we're now above price action. That's showing the potential at the top here. But for me to get interested in this I need to see two closes below the 21 to do that, OK.

So this is a kind of good one to stalk but in terms of one that's actionable what I would be looking at is the spiders which not only have the same -- if not a little bit more dramatic divergence, OK... right there. But they've also got price confirmation with two lower closes below the 21 EMA and Parabolic SAR is also above.

Well aren't you fighting the weekly chart here?

Yes, when you're trying to capture a reversal. It is going against the bigger term trends. These are heads ups. That's what you're looking for. It you look at say, you know -- let's look at Tesla. You know, when Tesla topped out you know, you can see right here Tesla had a very very massive bearish divergence. OK. We're making higher highs in Tesla, we had the bearish divergence. Once we got the two lower closes OK, it was over. At this point all rallies were sold and Tesla got crushed.

Now it you're looking at the weekly chart, was there a sell signal? Absolutely not. So the only place I look at divergences is on the weekly chart because a top here -- a top on the daily chart -- can turn into an eventual down trend on the weekly chart.

And of course, a classic top that everybody should study and watch this for in the markets that are coming up right now, is Apple. I mean this is a beautiful market. It has a beautiful squeeze. Everybody loved this product. I mean, you know -- gosh, what happened? Well, you had a pretty massive bearish divergence. So here we had higher highs, but huge bearish divergences. And you can see once we got two lower closes below the 21, we went from like 675 down to 500 very very quickly and continued going down. But during this time there was a weekly squeeze, OK. You can see that this is a beautiful market. Why would anybody want to short it? And that's why you go to the daily chart as your kind of a go to chart for that. All right. Hope that helps. You guys have a great night and we'll see you at the next update.