Editor's note: It's not often that you get to be a step ahead of the "experts"... But Ten Stock Trader editor Greg Diamond says the current market setup signals a pivotal inflection point that will determine where stocks go from here. In today's Masters Series, adapted from the August 19 Weekly Market Outlook issue, Greg examines an upcoming price divergence... explains why it signals more volatility ahead for stocks... and details how you can prepare to profit from this setup...
Prepare for More Fireworks in the Market By Greg Diamond, editor, Ten Stock Trader It doesn't matter what the "experts" tell you... No two market cycles are exactly the same. Of course, it's easy to look back and compare the current volatility with other major ups and downs. But history tends to rhyme rather than repeat, meaning it's a better guidebook than it is a set of hard-and-fast rules. Now, history can help us identify and navigate market trends, as well as understand investor sentiment throughout time. But as longtime Ten Stock Trader subscribers know, we need other clues to help us determine what might happen next. And divergence is one such clue... This technical phenomenon develops during key turning points in the market. Basically, when one index makes a new cycle low (or a high) while another one doesn't, this creates divergence. And it's usually a sign of a reversal on the horizon. We can see divergence in the price action and also between different sectors. In both cases, divergence often sets up buying opportunities. And that's certainly the case right now. Today, I'm going to cover a type of price divergence that will unleash fireworks in the market these next few weeks... When I mention divergence, the "Dow Theory" may immediately come to mind... Charles H. Dow developed this financial theory back in the late 1800s... It states that the market is in an uptrend as long as the major indexes move in a similar direction. For example, the Dow Jones Industrial Average ("Dow") and the Dow Jones Transportation Index ("transports") must mirror each other's movements to confirm a broad uptrend. So if the Dow is making a new all-time high, we must see the transports doing the same thing. That's not the case right now... The transports haven't been keeping up with the Dow for nearly three years. And when these two diverge, it signals that the current uptrend in stocks may be at risk. When analyzing these trends, we also have to factor in time and price... Over the past few weeks, I've been stressing that markets are approaching an important set of time factors (August 26 to September 13). As we close out this month and navigate early September, we'll likely see the most important inflection point of the year. Given the recent market rally, stocks should continue grinding higher into next week. This is where I'll use the Dow Theory, along with time and price, to determine good trading opportunities. Let's start by reviewing the transports... On the left side of the chart, notice the spike in late 2021 that marked a large top (labeled with the red arrow). As you can see, the transports suffered during the 2022 bear market, like many other sectors. But while sectors like technology and semiconductors recovered (and thrived) over the past two years, the transports have struggled to keep pace. The transports haven't made a new high above its 2021 high. In fact, it hasn't been able to surpass 16,716, which it last hit in the middle of 2023. On the right side of the chart, I've marked early September as the time frame for an important inflection point. With the transports lagging significantly, I'm not focused on whether this index makes a new swing high or not. The underperformance is crystal clear on its own. Now let's turn to the Dow... The Dow rallied above its 2021 high, unlike the transports. This is where time becomes very important... If the Dow makes a new high into late August/early September – as marked in blue above – this likely signals a top of some kind. It may not be the top, but the probabilities are very high that we'd see a wave of volatility. With time and price coming together, and the transports significantly underperforming, the Dow Theory will hold true once again... Stocks will be in for a wild ride to finish the year. I'll be tracking other divergences over the next few weeks as well... because it's not just happening in the Dow and the transports. (I'll be focusing on tech and semiconductors next.) For now, I'm riding the current wave higher in stocks and tracking the technical clues. But be prepared for more fireworks as this market divergence takes shape. Best, Greg Diamond, CMT
Editor's note: You don't have to be a victim of this ongoing market turbulence. You see, Greg believes a massive market move is set to begin around September 9... one with the potential to upend the U.S. presidential election and double your money 10 times as it unfolds. That's why he's hosting an online presentation on Tuesday, August 27 to reveal how you can prepare for this seismic shift. Click here to get the full details...
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