A new Bullish Divergence

Includes: DIA, QQQ, SPY
by: Paul Castro
Momentum Leads Price
Principle of Technical Analysis

On March 20th readers of my private blog were alerted to a bullish momentum divergence that had developed in the major indexes as of the March lows. To revisit the salient point of the analysis; while price had made lower closing lows on all of the major indexes on March 10th as compared to the closing lows on January 22nd, momentum made a higher low when comparing March 10th to January 22nd making a big move to the upside a likely event. This bullish divergence was resolved by the big upside move made by the averages on April 1.

A new bullish momentum divergence is taking shape that is likely to be resolved by higher price highs on the major indexes. While we have not seen a higher price high since October 2007 in the Dow and the S&P 500, it seems like it has been a lot longer.

To see the bullish momentum divergence of which I speak, follow the links for the Dow and the S&P. Note that in each index's price chart the price highs reached in the first few days of April were unable to exceed the price highs reached in the last few days of February. Then look above the price charts to see that the momentum highs reached on each index in the first few days of April were much higher than the momentum highs reached in the last few days of February.

Todd Chalem hit the nail squarely on the head when he posted that nothing is a certainty. The market can and will do just about anything. So while it's not certain that this latest positive momentum divergence will be resolved by an upside move that finally puts us back to higher price highs, I'll just have to say that I like the odds.