Chart 1: Momentum is losing steam despite market making new highs
Source: Short Side of Long
If you have been follow this blog, chances are you’ve seen these charts before. While the S&P 500 made all time new highs in recent days, with media celebrating 5 years of the bull market, the momentum between the price and the 200 day moving average continues to diverge bearishly. I do admit that over the last two decades, this is one of the longest periods where momentum has negatively divergence with the price.
Chart 2: Percentage of stocks above 200 day MA are in divergence too
Source: Short Side of Long
The breadth internals confirm the negative setup seen in Chart 1 too. For those wondering why the stock market correction still hasn’t occurred and how the divergence breadth vs new index highs is still in play, a great description can be found by reading the recent weekly update newsletter by Tom McCellan (a well respect technical analyst).
Furthermore, confirming the two charts above with the negative divergence warnings are breadth indicators such as percentage of S&P stocks with RSI above 70 and percentage of S&P stocks at 50 day new highs. I continue to advise investors that cautious is the best strategy, because even though the market has been able to rise almost vertically so far, these divergences do not go on forever. Eventually they do matter and usually the market gives back all of its gains since the divergence started, plus some.
Copyright © Short Side of Long
