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S&P 500 Momentum Is Bullish

10/18/11 09:08:34 AM
by Mike Carr, CMT

Rate of change in the S&P 500 shows strength in two time frames.

Security:   SPY
Position:   Buy

The Standard & Poor's 500 fell sharply during the summer months, and investors wondered if it were the start of a new bear market. The time for that concern has probably passed, and the decline was deep enough to be classified as a bear market by most. Since the worst of the decline, which lasted about three weeks, volatility has been high but prices haven't made much progress in either direction. On the weekly chart (Figure 1), price action doesn't show a clear trend.

FIGURE 1: S&P 500, WEEKLY. Weekly prices in the S&P 500 show a wide-ranging pattern forming after the decline.
Graphic provided by: Trade Navigator.
On that time frame, momentum has shown a small bullish divergence. The 26-week rate of change (ROC) failed to confirm the price lows in the S&P 500. While the divergence was small, it could be significant, given the strong bearish sentiment that exists in the market.

The daily chart (Figure 2) shows that the divergence is even more pronounced in the shorter time frame. ROC has also turned positive on that chart, and crosses above and below zero often indicate trend changes in the index. In this case, a bullish trend could be starting.

FIGURE 2: S&P 500, DAILY. On the daily chart of the S&P 500, the ROC divergence is much easier to spot.
Graphic provided by: Trade Navigator.
Other momentum indicators have shown a similar divergence formation as prices hit a new low. With sentiment being so negative, these divergences are worth noting. The S&P 500 is in a seasonably favorable time and more likely to challenge new highs to set a new low before the end of the year.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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