Why I'm still bearish on the stock market

I received an investment newsletter in my email that I think would be of interest to the BB members, but I am unable to post it or its chart because the newsletter is copyrighted. I believe I can, however, summarize it for you:

There is a "very serious negative bearish divergence" between the Dow Industrials and the Value Line Index. The Value Line Index consists of over 2300 stocks. The VLI has not confirmed the new highs of the Dow. A chart beginning October 6 and ending November 13 compares the Dow to the VLI and shows that the Dow has gone up nearly 6%, while the Value Line Index change is 0%. The Dow and the Value Line Index lines rise and fall very much in conjunction with each other on the chart, except the VLI does not come close to the percentage increases of the Dow and its line has been consistently below the Dow's line since about October 23rd when the negative divergence started. The divergence has gradually increased to nearly 6% as of November 13 and appears to be widening still.

The article goes on to explain that "...divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead."

(Quotes are from Jay Shartsis, options expert, Shartsis Options Alert, New York and were published in the November 16 issue of The Daily Reckoning newsletter.)

I will appreciate any commentary or opinions on this.

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Comment by BullBearGirl on November 18, 2009 at 2:30am: Here is a Nasdaq chart (QQQQ) with RSI:

http://www.traderslog.com/stock-charts.htm?page=chart&sym=QQQQ

Comment by BullBearGirl on November 18, 2009 at 2:25am: I found a current Value Line Index chart with RSI. I would appreciate an assessment.
Thank you.

http://www.traderslog.com/stock-charts.htm?page=chart&sym=%24VLA

Comment by BullBearGirl on November 18, 2009 at 2:15am: I was doing a search for Value Line Index vs Dow and came across the very same newsletter I referred to in my original post. Since it's out there on the search engine, it must be o.k. for me to post it. I don't see the head and shoulders formation on the Value Line Index he mentions in the article. Unfortunately, this chart ends Nov. 13. I wish I could find one that includes the 16th and 17th.

http://dailyreckoning.com/tracing-out-a-head-and-shoulders-value-line/

Comment by Steven Vincent on November 18, 2009 at 1:14am: I think we actually talking about a positive divergence here....the market is at highs in spite of the fact that the ratio is at lows. Normally they would decline together. My point is that this could be bullish, showing strength in the market. In addition, when and if the broader market....RUT, Value Line, Tech, Financials....starts to participate in the rally again, that will be potent fuel for a new rally. Already RUT is showing signs of waking up again.

OTOH, if we do not see this ratio start to improve, indeed the market could be in serious trouble.

Comment by BullBearGirl on November 17, 2009 at 6:13pm: Is there a similar chart for financials and the Nasdaq? Do they also show the negative divergences narrowing?

Comment by BullBearGirl on November 17, 2009 at 5:59pm: Do you know if the depth and length of the RSI dip before it starts to turn up again indicates a steeper or longer rally?

Comment by BullBearGirl on November 17, 2009 at 5:51pm: Aha - I see the upward movement now.

I tried to enlarge the first chart you posted, but was unable to for some reason and couldn't see the RSI label on the top section of the chart. This new chart I can enlarge.

The chart I saw comparing the Value Line Index to the Dow is not showing a narrowing of the divergence at all, although yesterday's and today's closes are not included on that chart.

Comment by Steven Vincent on November 17, 2009 at 5:33pm: The top portion of the chart is the RSI. The middle is the actual RUT:INDU ratio.

You can see more clearly that it appears that it is trying to bottom on an updated chart.

Comment by BullBearGirl on November 17, 2009 at 4:22pm: It's interesting also that while the top blue line is moving sideways, the middle portion of the chart (the RUT:INDU ratio) is declining. Maybe I'm not looking at this chart right, but that's what I see.

Comment by BullBearGirl on November 17, 2009 at 4:19pm: In looking more closely at your chart, I am unable to see what is beginning to turn up. Are you referring to the top portion of the chart with the light blue line? It appears to have turned up a bit for a while, but is now flattish.