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Tuesday, March 12, 2013

Telecom vs SPX

When I was updating the sector status page I noticed the telecom ETF IYZ was not doing well lately.  I looked back through the chart and I noticed something that struck me as odd.  I never really looked at telecom much before.  I had to go and find an index for it.  I found out $XTC is a North American telecom index.  In order to see if what I thought I saw was real I had to chart it against SPX.  Check out the blue trend lines between these two indexes in this series of charts.

When you look at the matching trend lines you will see a lot of divergences around turning points.  Sometimes the slopes of the trend lines are completely different.  Other times it is just the angle of the slopes that are different.  In almost every case SPX ended up going in the direction suggested by the $XTC trend lines.  The circled area in 2008 is the only time it went SPX's way.  It is a bit harder to see when the trend lines are in the same direction, but have different slopes.  However, sometimes it is glaringly obvious.  These are weekly charts so the divergences can last for quite some time.  The bigger sell offs in 2010 and 2011 both had noticeable negative divergences at the highs.  The 2010 and 2011 major lows both had a very nice positive divergence at the final lows.  There was pretty good hints in both directions of what was to come.

There currently is a noticeable divergence that has been developing since the high last Sept.  If you look at the 2000 and 2007 tops, there were sizable divergences there also.  Lets zoom in to the daily chart.

$XTC managed to get above its Sept. high, but failed to stay there.  On top of that big multi month negative divergence there is now a short term one.  $WTC has not participated in the current move to new highs by the other indexes.  Are we nearing another important turning point?

I don't know if it is because of the popularity of cell phones, but it has worked for as far back as my data in TradeStation goes.  With the world going more and more mobile it might continue to be important for years yet to come.  I think I might need to keep a closer eye on this index.


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