A new Bullish Divergence

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.

Comments

[steve west]

good on Ya Paul..
I like the odds too. The Bears are just wrong on this one and frankly have been for over a month...

[Moby Waller]

No time frame is given for this projected breakout to the upside. The S&P 500 would have to gain 15%ish to retake its old highs, and I would estimate this would take at least 6 months to occur, if at all. The NASDAQ, which he does not mention, would require about a 115% gain to reach its all-time highs! Check out my Mid-Week Update on BigTrends.com for an alternate technical view of the big stock index charts (SPY,QQQQ) and the CBOE Volatility Index (VIX).

[Paul D.Castro, CFA]

Moby,

I was referring to intermediate highs, not all-time highs. To illustrate, the last time the S&P 500 made a higher price high was on October 9, 2007 when it closed at 1,565 which exceeded the previous intermediate closing high of 1,552 reached on July 13, 2007. The most recent intermediate high was the close at 1,395 on February 1, 2008.

So when I say a higher high, I am looking for the S&P to close above 1,395 sometime in the next few weeks. Once that happens, then I'm looking for an intermediate low that does not violate the 1,273 close we saw on March 10, 2008. If this happens then a new series of higher highs and higher lows would have begun (ie, a new bull market).

[[e-mail]]

Look for an upswing in many common stocks and averages from mid April 2008 into late May 2008. Then sell in May and go away or maybe short. The following low should be in late October 2008. Then up again into May 2009 and down again to October 2009.

After that the upward move should be very rewarding.

We look at previous movements in like periods of past business cycles.

Good luck.

[NewstraderFX]

I'll give you another one to look at. Use a slow stochastic set at 5,3 and use a line chart to show closing prices.

Price closed at stoch oversold on March 31 and it closed stoch oversold on April 15. Price on April 15 was a higher price then on March 31. That means even though price has gone up at teh second point relative to the first the market still considers the price to be cheap, which is a bullish sign.

Another way of saying this is that the stochastic has made a double bottom.