Wednesday, September 14, 2011

Offense/Defense index

Over the years I've used a chart that tries to measure how offensive or defensive the market feels. Colleague Boris Simonder introduced me tot eh concept and I've been using readily available ETFs to calculate my own version. The idea is that when tech and cyclicals are in the lead the market feels good. And when healthcare and staples are in the lead, the market does not feel so good.

Here is the look over the past few years. Looks like a giant head-and-shoulders sitting on its neckline. At best, it is a break of the long-term trend t the downside.

Look back at the 2008-2009 bottom. This indicator set a higher low while the broad market set a lower low. A bullish divergence.


steve said...

hi. can you explain bullish divergence?

Michael Kahn said...

When an indicator makes higher lows and price makes lower lows, the two diverge from each other. In this case, it is a bullish divergence as price usually corrects in the direction of the indicator.

Will said...

Anyone who has bought in late 2010 and in the first half of 2011 is underwater and now watching the fundamentals fall apart. In short, rapidly approaching and significant overhead supply. 1230-1250 should be very tough resistance... in my humble opinion.

-Will L.

Michael Kahn said...


You nailed the psychology behind resistance. Human nature wants to get out even so when all these people who bought at high levels get close to it they will sell.