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

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Tom Bowley
About the author: co-founded Invested Central in 2004 and served as the site's Chief Market Strategist for more than 10 years. Invested Central provides stock market education and guidance for those interested in making their own financial decisions. During his tenure at Invested Central, Tom co-hosted Market Open LIVE, a national radio broadcast that covered many of the largest markets across the U.S. In addition, he has spoken at various conferences throughout the United States and Canada and has taught thousands of traders across the globe how to trade equities more wisely with an emphasis on managing risk and intermarket relationships. Learn More
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