In a week full of economic reports and an FOMC meeting, it was the stock of a company that operates a chain of game stores that got the market’s attention. The company, of course, was Gamestop
GME
The short squeeze intensified when it became apparent that 130% of GME’s available shares were sold short, and that hedge fund Melvin Capital needed an infusion of more than $2 billion to remain solvent after GME’s price skyrocketed, forcing them to close out their short positions. This story is unlikely to go away, as reports suggest a loss of $5 billion by short sellers on GME so far this year.
There were a number of analysts that, early in the week, did not see this volatile action in GME as a problem for the overall market. As I pointed out last weekend, a bearish or negative divergence had been formed in the daily Nasdaq 100 A/D line for the first time in over a year. This was in addition to other signs of elevated market risk and investor complacency.
Given those warning signs, it was not surprising that it was a rough week for the markets, as every major market average closed lower. There were consistent losses of 3.3% in the Dow Jones Industrial Average, the Nasdaq 100 Index
NDAQ
The weekly chart of the iShares Transportation Average (IYT) shows that last week’s close (point d) was below the Quarterly Pivot (dark blue) for the first time since May 29, 2020 (point b). The close was also below the uptrend from the March 2020 lows (line c) and the weekly starc- band. There is next good support at $204.17 (line a), which is 4.1% below Friday’s close. The MACD-Histogram also turned negative last week after forming lower highs, which was a negative, or bearish, divergence from the new price highs.
Divergence analysis is an important concept in technical analysis. Simply put, if the market is going one way, but indicators are going another, that may indicate an upcoming trend change. The divergences observed on the weekly charts are the most significant, and they can be observed at both market highs and market lows. Often divergences from the daily data are only warning of a pullback within the major trend, while weekly divergences often…
Read More: Did Gamestop Kill The Market’s Rally?