Seeking positive divergences

I know, I know, my posts have become infrequent of late. But after warning of the market's abrupt sell-off (Did you take proper steps?), I have been busy refining my buy list... and even buying.

Surprised? Don't be. Whereas the majority of investors assume a trader's break will morph into something worse and more enduring, I seek opportunities to invest. This is only one reason I prefer to be a long side-only investor; I want a clear head and mind to see always the opportunities as they build, never hoping for continued weakness, etc.

So I watch the market closely, diligently, reading its tea leaves for opportunities. As mentioned repeatedly, this decline to date is garden variety - nothing especially fearsome about it - and looks set to remain so; a trader's break only. What do I see...?

As the market (as measured by the S&P 500) declined, it made a lower low. See points 1 and 2 in the chart below.

[click on each chart to enlarge]

At point 2, it reversed hard... up. The chart continues to build as a budding intermediate term base. Because I do not purchase the indices but companies, I next seek those stocks of the companies on my perennial list of favorites that out-perform the market's benchmark index. And I see many; allow me to highlight only one.

In the chart below of Intuitive Surgical/ISRG (mentioned and recommended often), please note that its point 2 occurs at a higher low than that of the S&P 500, a positive divergence! This qualifies as bullish price action, which comes subsequent to a positive upside gap helping to validate the past ~8 weeks of trading activity as a base not a top. Now the shares near an important (but not crucial) breakout.


To place this interior pattern within context, within its continuum, let's look at the larger picture (below)...


Note the shares have been trading sideways for 17 months, since its bullish breakaway gap in October 2005, almost doubling in price to ~$140, and quickly. Perhaps oddly, certainly different from most analysts, I identify all the action as an intermediate term base; now the shares sell just at the midway point, neither here nor there. However, all chart appearances support the argument for upside breakouts at ~$116, ~$118, ~$125, ~$132, and ~$140 to occur soon.

Please do not think I caterwaul for investments solely on the basis of charting and technical analysis; I do not. In truth, I consider carefully and diligently - fundamentals, valuations, and economic opportunity - those companies I deem merit my investment monies. However, once having made that determination, my investment interest manifests as the stock, so I watch and watch and watch the stocks' oscillations, as I await my moment to purchase. Please review this site's archives for my investment rationale for Intuitive Surgical/ISRG. But if you want to obtain immediately a 'handle' on why I find Intuitive Surgical/ISRG to be such a tremendous opportunity, then please download and read this 6 months-old but still excellent research report by Wachovia...


The Wachovia analysts, Michael Matson and Vincent Ricci, do a fantastic job explaining why this company merits your attention and investment monies. This brokerage report might be the best one of its ilk I have ever seen, as it covers fundamentals, valuations, the company's opportunity and risks, and all in an easily understood presentation.

No matter the amount of time Intuitive Surgical/ISRG requires to trace out this base, its doing so helps diminish the company's outsized valuation; as the P (price) goes sideways the E (earnings) continues to explode higher. And its PEG shrivels as well.

And, really, is this not the type of growth company we all hope to own so that our portfolios' values mirror the growth of its holdings?
-- David M Gordon / The Deipnosophist