Divergence Told the Tale

There are times in your trading life when you have to look beyond what's happening to a stock's price vs. what the technicals are telling you about that move in price.

On Thursday evening, Research In Motion (RIMM - commentary - Cramer's Take) came out with earnings that beat the Street estimates, and, thus, the shorts ran for the hills and covered away, moving the stock sharply higher in the after hours. Its high was almost 144. That is quite a move after closing at 133.70. Ten dollars isn't a small move, even for a stock as volatile as RIM.

I can't tell you how sad it made me to see the small investors cover their short and other small investors chasing the play higher. If you look at RIM's daily chart, it was as clear as could be. Massive, and I mean massive, negative divergences at the top of this move near 144 in the after hours. It could do only one thing when the divergences are that negative, and that is fall.

The scared shorts want to cry, and the overly bullish longs want to join them in a harmony of tears. There was no reason for the bears to buy back the stock at the 144 area, and there was no reason for the bulls to be chasing. They would have recognized that had they done some simple technical analysis of the stock.

Not only was there a negative divergence on the MACD, but it was there as well on the stochastics and RSI, two momentum indicators. All of the key oscillators foretold the move lower off the top. It's bad enough to have a negative divergence on the MACD, which is the key indicator to look at with regard to any divergence, but when all of the oscillators have that type of divergence, it's a bad sign for the near term. I'm not talking necessarily the long term, but clearly the short term is going to be a battle. It'll hold up to some degree because it's loved, but it'll be harder and harder in the near term to take out that $140 to $142 level with those daily divergences in place.

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It's important to understand that this negative divergence on the daily chart isn't a death sentence for RIM. Over time, the divergence will play out and allow for this stock to move back higher, but you have to focus on the near-term message, and that says it will be tough to maintain strength.

Sure RIMM can hold up, but remember, it was up more than $10 on Thursday night, and look where it ended today. It may not have collapsed, but it's little comfort to those who chased this hard at over $140 or the shorts who covered at $140 or higher.

RIM should have trouble maintaining strength until it can form a positive divergence -- which, you can rest assured, it will over time, but it's very unclear as to when. It's not likely to happen any time in the next few weeks, so please be aware of that. When you see the next positive divergence on it, buy it hard. Until that time, sit on your hands and fight the temptation to play this high-beta beauty.

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At the time of publication, Steiman had no position in the stocks mentioned, although positions may change at any time.

Jack Steiman is president of TheInformedTrader.com, for which he also conducts live seminars, and Steiman New Research Group, LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Steiman appreciates your feedback; click here to send him an email.