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One thing modified on November 5, 2021.
The S&P 500 had efficiently damaged up by way of the earlier resistance stage round 4550; early November noticed the benchmark proceed larger to lastly attain 2700 on November fifth. Till that first Friday in November, the S&P 500 seemed to be in a raging uptrend, with down days turning into a uncommon exception to the bullish each day transfer in shares. From that day on, the S&P has transitioned from a bullish market to a sideways market, significantly on the short-term timeframe.
My Market Trend Model has remained bullish on the long-term and medium-term time frames, suggesting the latest consolidation may be thought of a pullback inside the general bullish pattern for the S&P 500. However what concerning the momentum traits?
On November 5, because the S&P first reached 4700, the RSI peaked round 76. That was overbought, which indicated sturdy upside momentum into that new all-time excessive. On November 16, when the S&P reached 4700 for the second time, the RSI was round 70. When the S&P reached its highest stage to this point, 475 on November 22, the RSI was round 64.
This week, the very best studying for the S&P 500’s RSI was round 55. That is proper — we have now the dreaded bearish momentum divergence. Each time probably the most extensively adopted US fairness benchmark reached 4700, the RSI has moved decrease and decrease. It is a signal of weakening shopping for energy, with much less and fewer momentum behind every try.
On my each day market recap present, The Final Bar, I attempt to remind viewers that your objective as an investor ought to be three steps:
- Establish developments.
- Observe these developments.
- Anticipate when these developments are exhausted.
The third step includes utilizing charts to establish indicators of pattern exhaustion. Bearish divergences, utilizing momentum indicators, breadth indicators and even quantity, may be a sign that upside potential is proscribed, because the pattern could also be nearing an exhaustion level.
We now have seen a bearish momentum divergence thrice earlier in 2021. In January and February, we noticed a couple of 5-6% correction to the 50-day shifting common earlier than the uptrend resumed. Then, in April and Might, we noticed one other bearish divergence and the S&P pulled again round 4%. Lastly, in July 2021, there was little or no pullback after the divergence. The S&P accelerated to new highs on rising momentum, successfully eliminating the bearish divergence situation.
What would verify the present momentum studying and point out a excessive potential for a market pullback? The S&P 500 really touched its 50-day shifting common on Friday of this week earlier than closing simply above that stage. Earlier bearish divergences in 2021 noticed a pullback to across the 50-day shifting common earlier than resuming the longer-term uptrend. A break of the 50-day shifting common subsequent week can be a robust bearish sign, and an additional drop beneath the 4500-4550 stage would take the S&P beneath earlier value assist. In that case, you will note me writing articles a couple of sturdy potential for additional draw back value motion!
Alternatively, what would invalidate this bearish divergence and point out an “all clear” for the S&P? Much like what we noticed in August, a bearish divergence can be thought of invalidated in case you noticed the worth proceed larger and with the next RSI studying, not a decrease one. In different phrases, you would wish to see the market transfer larger on stronger momentum, not weaker momentum.
The S&P 500 has basically been rangebound for the final six weeks, with 4500-4550 as assist and 4700-4750 as resistance. The bearish divergence means that momentum is weakening and a transfer decrease is a definite chance.
For now, I’d establish key levels to watch for all of your positions. Take note of market internals and search for draw back follow-through. Most significantly, consider the S&P 500 by way of chances, not certainties. You by no means know what tomorrow could carry!
For a video dialogue on momentum divergence together with one key inventory exhibiting a bullish divergence, head over to my YouTube channel:
RR#6,
Dave
P.S. Able to improve your funding course of? Try my free course on behavioral investing!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator, and don’t in any approach symbolize the views or opinions of every other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps buyers reduce behavioral biases by way of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor choice making in his weblog, The Conscious Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing threat by way of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to establish funding alternatives and enrich relationships between advisors and purchasers.
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