RELATED TOPICS --> | McClellan Introduction | How to use the McClellan Breadth Indicators |
                               | Using the Disparity Index to check for exact divergences |

Bearish divergence of the McClellan Summation Index is in almost all cases, a warning of an impending correction. This divergence occurs when the MCSI is in a downward or sideways trend whilst the JSE is in an upward trend. It tells us that the market is weakening as fewer and fewer shares are contributing to the rise in the JSE - a classic sign when we are nearing a top or peak in the market. 

Bullish divergence is when the MCSI is advancing (or declining slower) than the JSE and normally precedes strong market conditions, but for the rest of this section we will just focus on the bearish divergence.

MCSI bearish divergence is but one of the indicators used by the PowerStocks PeakFinder (in development) to figure out when we are nearing major market tops and provide advance warning to our subscribers to start de-risking their positions and begin phasing into cash. Checking for this divergence visually on charts can be subjective and sometimes challenging, so PowerStocks have developed a precise mathematical tool to detect the occurrence, size and direction of McClellan divergences, called the McClellan Disparity Index, which appears in the latest JBAR reports.

There have been 20 instances of MAJOR divergence (more than 10 days) with the JSE recorded with the McClellan Summation Index and in each occasion it occurred shortly before a correction. Some corrections were 7% but many were brutal, ranging from 18% to 45%. The chart below shows the last 8 such divergences and the corresponding sizes of the corrections that followed them.



We note from the above and below charts that apart from divergences 8,11, 12 and 16 the divergence periods do not last for very long. Also as can be seen from divergence 3,4,7,8,9,12, 14 and 16, sometimes the MCSI will turn up to follow the market and break the divergent trend, to mark the "blow off" period just before a major crash.



The above and below charts, unlike the first chart, are logarithmically scaled (base-10) to better show the effects of the declines. Not every correction was preceded by divergence, but every case of divergence preceded a correction.



Checking for this divergence visually on charts can be subjective and sometimes challenging, so PowerStocks have developed a precise mathematical tool to detect the occurrence, size and direction of McClellan divergences, called the McClellan Disparity Index, which appears in the latest JBAR reports.


RELATED TOPICS --> | McClellan Introduction | How to use the McClellan Breadth Indicators |
                               | Using the Disparity Index to check for exact divergences |
 
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