Today we continue from our last discussion with a new topic: A Bearish Divergence Is Taking Shape. This refers to a clear bearish divergence currently developing in the market.
Review: The Pullback on August 3
On August 3, TCS pointed out that QQQ dropped 4.16% in just two days. This was a meaningful move in terms of size, but the short time frame wasn’t enough to confirm a short-term top. Major U.S. indices rarely form tops with sharp V-shaped reversals. More often, they take the form of rounded tops, which take time to develop.
And as expected, over the next four trading days, QQQ climbed back near its previous high. So now the key question is: what comes next?
Introducing Market Breadth
To answer that, we need to look beyond just price. We also need to assess market breadth. There are many ways to do this, such as tracking the percentage of stocks above certain moving averages or comparing advancing versus declining stocks.
TCS prefers one specific metric:
The percentage of stocks that have pulled back less than 5% in the past month. This helps identify how many strong stocks are holding up.
Currently, only 40% of stocks meet this condition. That means 60% are showing relative weakness. Back in July, market breadth was close to its peak. Now, even though QQQ has returned to or even exceeded those price levels, internal strength is clearly weaker.
This is a classic bearish divergence: price remains high, but participation and strength under the surface are falling.
Divergence ≠ Immediate Drop
A clear divergence doesn’t mean the market will fall right away. Tops usually form over time. So rather than rushing to short, it’s better to ask: what trades still offer a positive expected return in this environment?
For many, shorting means buying inverse ETFs. This can work—but risk management is key. For example:
SH (1x inverse S&P 500 ETF) — entry can be considered after a 50%–75% retracement of a recent move up. But always set your stop below the previous low.
Make sure to define your risk level before entering any trade.
Another Approach: Focus on Strong Stocks
Shorting isn’t the only way to make money. Every market phase has strong stocks with trading potential. Here are a few highlighted in past videos or posts:
• Gold stocks (e.g., GDX, AEM) — have recently broken out and continued to rise.
• Consumer stocks (e.g., WMT, and even the relatively weaker COST) — are showing relative strength.
These types of stocks often provide more stable and consistent returns compared to simply betting against the index.
A Practical Tip: How to Tell If a Price Level Holds
Many ask how to know if a price level—like QQQ at 563—is holding.
TCS uses this rule: Don’t just watch the price. Also track the 8-day EMA (Exponential Moving Average).
For example, if QQQ tests 574–575 again, a true breakout would require the 8-day EMA to break above and stay above that level. If price moves up but the EMA doesn’t follow, it’s often a false breakout.
This rule also applied to the Russell 2000. On July 23, it looked like it broke out above 225, but the 8-day EMA didn’t confirm it. Price soon turned lower.
One More Strong Stock to Watch: Tesla (TSLA)
Looking at the daily chart, TSLA is forming a symmetrical triangle and is approaching the point where the pattern tightens. Based on past behavior, TCS believes there’s a higher chance of a breakout to the upside. The ideal target zone is around 400, making this a potential trade with positive expectation.
Final Thoughts
Don’t get stuck in the mindset of “the market is near a top, so I must short.”
Each phase of the market offers opportunities—whether in defensive sectors, commodities, or selected growth stocks. Right now, internal market strength is weakening, which calls for caution on the index. But areas like gold stocks, consumer names, utilities, and possibly an upward breakout in TSLA still offer clear trade setups.
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