Don't Ignore This Chart!

A Momentum Divergence for the Regional Bank SPDR


I do not use bullish and bearish divergences with momentum indicators very often because they usually form in the direction of the bigger trend. For example, most bearish divergences form in uptrends and most bullish divergences form in downtrends. I trade in the direction of the bigger trend and prefer to ignore such divergences.

The Regional Bank SPDR (KRE) fits my divergence criteria because it is in a long-term uptrend. The long-term trend is up because the ETF recorded 52-week highs in mid-March and mid-June, and the 50-day EMA is above the 200-day EMA (not shown).

A small bullish divergence occurred because the ETF formed a lower low from late June to mid-July and the indicator formed a higher low. Also notice that RSI held above 30 with last week's dip and this means a bullish failure swing could also be forming.

Returning to the price chart, this is also a good spot for a price reversal. Notice that the decline into mid-July retraced around 2/3 of the prior advance and returned to the breakout zone (61). Broken resistance turns support and 2/3 is the maximum retracement expected for a correction.

In short, it looks like the pullback is ending and the bigger uptrend is taking over again. This projects a move to new highs in the coming weeks.

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Topics for Tuesday, July 17th:

  • Index New Highs Still Dragging, but Net Bullish
  • Tech, Staples and Healthcare Lead New High List
  • Materials SPDR and Top Component Look Weak
  • XLE Forms Bull Pattern as XES Hits Moment-of-truth
  • Stocks to Watch (Big Banks and Big Healthcare)
  • Click here to Watch

- Arthur Hill, CMT

Senior Technical Analyst,

Book: Define the Trend and Trade the Trend
Twitter: Follow @ArthurHill

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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