BofA Merrill Lynch technical analysts Stephen Suttmeier and Xue Jiong see two “triple bearish divergences” emerging in the stock market as the S&P 500 rolls over from new all-time highs made after last Wednesday’s shock FOMC decision to refrain from tapering back quantitative easing.
The first divergence can be seen clearly in the chart below. As the S&P 500 continues to make higher highs, the percentage of S&P 500 stocks above their respective 200-day moving averages is making lower highs.
“Both the S&P 500 and percentage of S&P 500 stocks above 200-day moving averages have stalled at key trend line resistances,” write the analysts in a note to clients. “Lower tops for the percentage of S&P 500 stocks above 200-day moving averages and higher highs for the S&P 500 is a triple negative divergence.”
The second triple bearish divergence is in price momentum indicators — specifically the Moving Average Convergence-Divergence (MACD) and the Relative Strength Index (RSI).
“The S&P 500 has three higher highs, while weekly MACD and RSI remain in downtrends off those S&P 500 highs — this is a potential triple bearish divergence,” say the BAML analysts.
The bottom line: “This sets up triple negative divergences. With overbought short-term indicators, the risk is S&P 500 resistance near 1728-41 holds for now.”