You can see it nearly everywhere you look. Divergence.
Divergence in strength, divergence in price and volume – you name it ……divergence is everywhere.
Perhaps even “you yourself” – have been “diverted” ( no kidding eh? -I bet you think things are on the “up and up”! )
A false sense of reality perhaps? A “looking away” if you will?
Lets look:
EEM_Emerging_Markets_July_2014
This is distribution. This is bearish “beyond” bearish but of course….no no….that can’t be! CNBC says it’s all gonna be fine!
I point this crap out for your own learning. You can alway look for “divergence” when price moves upward yet “volume” moves down.
It’s bearish as all get out
Reading the Market’s True Language: Volume Never Lies
The mainstream financial media wants you to believe every uptick is a new bull market. They’ll parade out talking heads who spin fairy tales about “healthy corrections” and “buying opportunities” while completely ignoring what the volume is screaming at anyone willing to listen. Volume is the market’s truth serum – it strips away the noise and shows you exactly what smart money is doing while retail traders chase green candles into oblivion.
The Distribution Game: How Smart Money Exits
When you see emerging markets ETFs like EEM climbing on pathetic volume, you’re witnessing textbook distribution. This isn’t some abstract concept from trading textbooks – this is institutional money quietly heading for the exits while retail bagholders pile in. The smart money accumulated when everyone was scared, and now they’re distributing into strength while CNBC cheerleaders convince the masses that everything is fantastic.
Distribution phases can last months. They’re designed to be subtle, to keep the party going just long enough for institutions to unload their positions at premium prices. Every rally becomes a selling opportunity. Every dip gets bought by naive traders who think they’re “buying the dip” when they’re actually providing liquidity for sophisticated exits.
Currency Implications: When Risk Assets Fake Strength
This divergence game isn’t isolated to equity markets – it ripples through every corner of the financial universe. When emerging market assets show this kind of bearish divergence, it’s a red flag for risk currencies across the board. The Brazilian real, Mexican peso, and South African rand all dance to the same tune as their underlying equity markets.
Smart forex traders understand that currency strength isn’t just about interest rate differentials or economic data. It’s about genuine risk appetite versus manufactured optimism. When USD weakness coincides with bearish divergences in risk assets, you’re looking at a setup that can devastate unprepared positions.
The Volume-Price Relationship: Your Early Warning System
Professional traders obsess over volume because it reveals intent. Price can be manipulated – algorithms can paint charts, central banks can intervene, and momentum chasers can create temporary spikes. But volume shows you the real conviction behind every move. When price advances on declining volume, institutions are distributing. When price declines on expanding volume, they’re accumulating.
This principle applies whether you’re trading EUR/USD, watching commodity currencies, or positioning in emerging market currencies. The relationship between price and participation tells the whole story if you’re disciplined enough to listen. Most traders ignore volume completely, focusing only on price action and wonder why they consistently get caught on the wrong side of major moves.
Positioning for the Inevitable Reversal
The beautiful thing about recognizing distribution is that it gives you a massive edge when the reversal finally comes. While everyone else is caught off guard by the “sudden” collapse in risk assets, you’ll be positioned to profit from the panic. This isn’t about timing exact tops – it’s about understanding that unsustainable trends built on weak foundations eventually crumble.
When market bottoms finally arrive, they’re typically accompanied by genuine capitulation volume. Real fear, real selling, real opportunity for those who understood the distribution phase was setting up the eventual collapse. The same institutions that quietly distributed at higher prices will aggressively accumulate at lower prices – and this time, volume will confirm the move.
The market doesn’t ring bells at tops any more than it does at bottoms. But it does leave clues for those willing to study volume patterns, respect divergences, and ignore the noise from financial television. Divergence isn’t just a technical indicator – it’s the market’s way of warning you that appearance and reality are about to violently converge.
Volumeless markets just make it easier for hft to push them around
Exactly.
Like I said, none of those divergences matter. All that matters is whether the Fed can continue to prop up the market. I’m certainly not going to bet on the Fed, but neither would I bet against them. They do have a pretty big printing press and apparently it can turn the futures market on a dime just about any time they want.
Wouldn’t higher prices on lower volume indicate a lack of sellers?
What’s up, every time i used to check blog posts here early in the
break of day, as i love to find out more and more.