Divergences may be signalling another pullback

Long time reader Dave H. noted in a comment recently that the 5% pullback in Sept/early October was pretty tame. Agreed. Since that less-than-spectacular correction, investors have returned, citing that correction as “the one” –  and now its time to move on. While I would generally agree that markets are setting up for a decent winter (for example- breadth is improving, always a good sign), we need to keep in mind a few factors that may push markets into one more corrective move.

For instance:

  • This week is an earnings-heavy one. That can lead to shocks.
  • The market can also be a little volatile in the final week of October seasonality-wise.

Finally – I have pointed out a few momentum divergences to you on this blog recently. They don’t seem to be fully rectified. These unresolved momentum divergences leave me wondering if we will get one final pullback before the “Best six months” seasonal period begins in early November.

Below, I have posted charts of the most significant markets with some key momentum oscillators. Where divergences have occurred, I have marked them. Note that divergences have often (not always) given decent heads-up signals to corrective periods. Its up to you to decide if this may be one of those times.

S&P 500

Note how divergences across a number of momentum indicators often signal a market correction on the SPX. Many divergence signals happening right now.

NASDAQ

NASDAQ momentum divergences are pretty revealing, and have happened often enough prior to market peaks. The recent divergence signals are steep indeed. The MACD divergence is rather alarming for the NASDAQ.

TSX 300

The TSX has been pretty non-correlated to USA markets. Its peak in 2018 was “duller” than US indices – inspiring slower momentum lead-ups. Divergence signals seem to be rare in most cases for the TSX.  Until now…Something has changed.  Strong divergence signals are occurring on this index right now.

 

MSCI WORLD X-USA

Very few divergences were seen prior to the X-USA index selloffs. However, we are seeing very strong signals right now. Something’s amiss in the world….

 

quote-teal

4 Comments

    • Sam–understand that this blog isnt a prediction for a pullback– its just a comment that the divergences increase the odds for a pullback. If markets do pull back, they may find support at the recent pullback levels around 4300 (SPX)

      Reply
  • Hi Keith,
    I briefly heard a snippet on BNN about Friday being a significant day on the markets. Something with options happens that day. Do you happen to know what they were referring to? If so, can you elaborate?
    Thanks
    Wendy

    Reply
    • Not sure–expiry is normally the 3rd week of the month (this is the last week)–no triple-witching date — only thing that is significant this week that I am aware of is the large number of tech stocks reporting. that can make or break the market or at least the NASDAQ–but I am not sure what the options events are that might be more than normal

      Reply

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