Don't Ignore This Chart!

Slowing Momentum And Negative Divergences Are Wreaking Havoc On Equities

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The U.S. stock market has been suffering from a series of negative divergences that have run rampant throughout many sectors and industry groups.  As one weakening group sells off, money rotates to another strengthening group.  We have not been seeing wide participation moves to the upside.  The sector performance over the past month underscores this.  The energy sector (XLE) is higher by 4.05%.  The utilities sector (XLU) is lower by 4.59%.  Technology (XLK) has risen 2.49%.  Healthcare (XLV) has fallen 2.03%.  With respect to the latter, medical equipment stocks ($DJUSAM) printed a negative divergence as they broke out one month ago.  Since that time, the DJUSAM has badly lagged the S&P 500, but is now testing relative support.  Check out this chart:


I look for 50 day SMA tests when I see negative divergences emerge on daily charts.  So the recent action on the DJUSAM down to its 50 day SMA is not at all surprising to me.  The red vertical line in the above chart shows how the DJUSAM began underperforming after the negative divergence printed.  Fortunately for the overall market, money rotating away from this industry has found a home elsewhere.  This behavior is keeping the bull market alive.  It now appears that the DJUSAM could be primed to lead again, now that the slowing momentum issues have eased.  The DJUSAM is sitting squarely on relative support and one stock within the industry - Zimmer Biomet Holdings (ZBH) - appears primed to benefit if the group re-emerges as a leader.  Note that the recent selling in the DJUSAM has resulted in an RSI reading near 40, where we usually find support during an uptrend.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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