Divergence: Is when the price of an asset and an indicator, index or other related asset move in opposite directions. Divergence can be seen as positive or negative. Three charts below show of such negative divergences against the S&P 500 making new yearly highs this past week. First lets show the S&P 500 chart making a new high for the year below. Click to enlarge.
The first divergence is against copper. Copper is a leading commodity that is used in almost every building project whether residential or commercial.
Next is the transportation index. This index is the most widely gauge of American companies moving products. Again we see the negative divergence.
Lastly, the BPNYA is known as the bullish percentage of stock charts in the New York Stock Exchange. Basically measures the breadth of the stock market. With the market making new highs, breadth should confirm or be close to also making highs.
Bottom Line: The market has made a new high for the year this past week. But there are some negative divergences as seen from the three charts above. The market can continue to move higher despite these negative trends, but eventually the negative trends will catch up, and stocks will face a correction. We will be sellers as the market continues to trend higher and eventually may initiate a short position in the market when the time is right. Thank you for reading.
