Potential Divergences Are Cropping Up

On Wednesday the S&P 500 rallied 1.2%, recovering most of Tuesday’s 1.3% loss. Breadth and volume ratios were solidly positive. Overall, the index is very close to setting new rally highs.

That said, divergences are beginning to crop up. For example, both near and medium term momentum indicators remain under pressure. The dollar index is well above its recent low and the Baltic Dry Index is well below its June high. Meanwhile, almost half of the stocks in the S&P are more than 5% below their ytd high and one-quarter are at least 10% below their ytd high. There is also a number of currently minor point and figure diverges; however, the longer they persist, the more important become.

S&P 500 and Baltic Dry Index
All of this is at least initial evidence of a narrowing of the rally. Fatigue is becoming more evident. A surge will eliminate some of these divergences, but not all. So the seemingly one-sided array of confirmations that existed a week or two ago is not so one-sided any more. There are cracks in the armor.

These signs of fatigue do not rule out higher highs over the near term and the divergences will only be potential divergences as long as the trend continues higher. Thus, until the index reverses and breaks back below at least 991-990 the market can still overpower these potential divergences. But the current conditions are signs of possible change.

With the above in mind, the door remains nominally open for continued probing of chart and Fibonacci resistance in the 1007-1048 range.

Conversely, a violation of 991-990 would do much to lock in the rally from the July 8 low as a complete pattern. That said, the July low itself at 869 is still viewed as tactical support.