Momentum’s Negative Divergence

If you are like me you hate roller coasters. I know a lot of people enjoy them, they like the thrill of going up and down really fast while getting the adrenaline boost of almost dying. But they aren’t for me. I’m the guy who will sit in the middle, gripping the safety bar waiting for the stupid thing to be over.

This market has been like a roller coaster. We’ve had 5 days up, followed by 3 big days down to the previous low, then we had 3 days to break passed the previous high. This has likely been a short-term trend follower’s worst nightmare. Luckily we have had a fairly decent pulse on where things have been, with the note of support on July 25th, right before the three-day rocket we recently experienced. However, the weakness we looked at on July 24th in the small caps is still present, experiencing somewhat severe under performance to to large caps over the past few days..

I’m a big fan of the McClellan Oscillator, which I’ve discussed numerous times (here, here, and here). As you can see below in the top panel, the McClellan Oscillator has not mirrored the price action of the S&P 500 with higher highs. We’ve seen the McClellan fall from 100 to -2.75. In the bottom panel I’ve included the Ultimate Oscillator which takes into account three different time periods to measure momentum, this momentum indicator is also showing us a negative divergence.

Tomorrow will likely be a critical day for the market with it being a FOMC announcement day. It seems the market has been trying to price in additional easing, so if Bernanke does not give the equity market what it wants, then possible weakness could be in store.

 
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

About Andrew Thrasher

Andrew Thrasher is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

One Reply to “Momentum’s Negative Divergence”

  1. Nice to see others who enjoy technical analysis! I too am expecting a drop in the market and took a position with the SPY 139 puts. But I have to admit, with all the negativity thrown at this market, it should have cracked a little. I think the algos are helping out ;). Great post and thanks for sharing your technical analysis!