From the desk of Tom Bruni @BruniCharting
This is going to be a quick post, but I wanted to share what I thought were some short-term positives from my review of our coverage universe.
When we have significant drawdowns and/or our downside price targets are hit, I like to go through the major US Indexes and Sectors and Sub-Sector ETFs to look for momentum divergences. Typically at significant bottoms we’ll see an overwhelming number of bullish momentum divergences, not only here in the US, but all around the globe.
The problem is, I didn’t see as many as I would’ve expected, but there was an underlying theme among the ones I did see: They were in what most would characterize as the more aggressive areas of the market.
I won’t list them all, but some areas I saw divergences in across market-cap segments were Growth tilted ETFs, Transports, Technology (XLK & every Tech Sub-Sector ETF), Consumer Discretionary, Homebuilders / Construction ETFs, Materials, Industrials, and many major US Indexes.
Click on chart to enlarge view.
Where I did not see many divergences was the defensive areas of the market, many of which look similar to the S&P 500 Low Volatility ETF and may be due for a pause after a swift run higher on a relative basis. Other areas were Value tilted ETFs, Min Volatility or Dividend Appreciation ETFs, Real Estate, Utilities, Consumer Staples, Telecom, etc.
So how is this information useful? Well for now it’s useful for market context, however, if price confirms these “potential divergences”, then it can become actionable either directly or indirectly. You can either use it to help find trade ideas (directly) or use it as another piece of information to form your market view (indirectly).
With that said, if you’re inclined to look for short-term opportunities on the long side, then this development might suggest looking at some of the more risk-on areas of the market right now.
A sector like Home Construction, which everyone seems to have left for dead, is potentially confirming a failed breakdown and bullish momentum divergence. Not only do these conditions increase a counter-trend trade’s probability of success, but it allows you to define your risk while participating in a favorable reward/risk opportunity.
Another positive I see is in Energy. Crude, Gasoline, and Heating Oil attempted to gain their footing earlier this month and failed miserably, but they’re trying again. Given how big the divergence is this time and that it’s occurring during a period of lighter trading, something tells me this is the classic “one more low” and then rip type of situation we see play out time and time again. Regardless of what happens, the point stands that a bounce in Oil would be a positive for stocks in the short-term.
Hope you found those observations as interesting as I did. It will be interesting to see how these divergences play out in the weeks ahead.
Thanks for reading and let us know your thoughts!