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Bearish Divergences Warn Stocks Are Topping

April 17, 2016

Just as we saw similar warning signs prior to the January 2016 stock market decline, so too we see similar warnings now.

The important point to focus on this weekend is there are large, growing and widespread Bearish divergences between rising prices and declining 10-day average Advance / Decline Line Indicators, and between rising prices and declining Demand Power measures. These divergences are showing up in Blue Chips, Techs, and Small Caps.

Our Demand Power / Supply Pressure Indicator

(The Short/Medium-term Time Horizon Trend,

typically from 1 to 3 Months)

There is a Bearish Divergence developing between Demand Power and Prices, warning stocks are topping. Further, the Demand Power and Supply Pressure Measures are converging, which could be an early indication of a coming sell signal.

Our Demand Power / Supply Pressure Indicator generated a new Buy signal on February 17th, 2016, and remains there April 15th. Since that Buy signal, the Industrials have risen 1,339 points! This indicator works!

After the DP/SP Indicator triggered a Sell on December 31st, the S&P500 dropped 231 points. After this Sell Signal, the Industrials plunged 1,974 points.

Our Secondary Trend Indicator

(The Intermediate-term Time Horizon Market Trend,

typically from 3 to 12 Months)

Above we show Bearish Divergences with red diagonal lines, followed by the subsequent decline also in red. We show Bullish Divergences with green diagonal lines followed by the subsequent rally, also in green. You can see divergences are amazing early warnings of significant changes in the direction of price trends. Yellow lines show the subsequent price move after new Buy or Sell signals actually occur.

Our Secondary Trend Indicator triggered a new Buy signal Thursday, March 3rd. After the July 22nd, 2015 Sell Signal, the Industrials fell 2,400 points through January 20th, 2016!

Take note that a huge Bearish Divergence was occurring between our Secondary Trend Indicator (was declining) and stock prices (were rising) during the last three months of 2015, which was warning in flashing neon lights that a significant stock market decline was approaching. Further, notice that because this divergence was huge, it was telling us the approaching decline would be significant. Well, it was, as U.S. stocks saw their worst start to a year ever!

A recent Bullish Divergence led to a rally.

Our S&P500 versus

10-Day Average Advance / Decline Line Indicator

(Identifying Bullish and Bearish Divergences for early detection of future trend turns)

There is a large and growing Bearish divergence between the NYSE 10-day average Advance/Decline Line Indicator and the S&P500, an early but important warning that a stock market decline that is significant is approaching.

Take note that a similarly sized Bullish Divergence led to a strong rally the past few months. Now the opposite condition is occurring. Fewer and fewer stocks are participating in the rally the further it rises, a pre-condition for a strong decline.

Our NASDAQ 100 versus 10-Day Average Advance / Decline Line Indicator

(Identifying Bullish and Bearish Divergences for early detection of future trend turns)

There is a large and growing Bearish divergence between the NASDAQ 100 10-day average Advance/Decline Line Indicator and the NASDAQ 100, an early but important warning that a stock market decline that is significant is approaching.

Take note that a similarly sized Bullish Divergence led to a strong rally the past few months. Now the opposite condition is occurring. Fewer and fewer stocks are participating in the rally the further it rises, a pre-condition for a strong decline.

Our NASDAQ 100 Demand Power / Supply Pressure Indicator

(Identifying Medium term Buy and Sell Signals and also

Bullish and Bearish Divergences for early detection of future trend turns)

There is a large and growing Bearish divergence between the NASDAQ 100 Demand Power Measure and the NASDAQ 100, an early but important warning that a stock market decline that is significant is approaching.

Take note that a similarly sized Bullish Divergence led to a strong rally the past few months. Now the opposite condition is occurring. Less and less Buying enthusiasm is occurring the further prices rise, a pre-condition for a strong decline.

Our Russell 2000 versus 10-Day Average Advance / Decline Line Indicator

(Identifying Bullish and Bearish Divergences for early detection of future trend turns)

There is a large and growing Bearish divergence between the small cap Russell 2000 10-day average Advance/Decline Line Indicator and the Russell 2000 price index, an early but important warning that a stock market decline that is significant is approaching.

Take note that a similarly sized Bullish Divergence led to a strong rally the past few months. Now the opposite condition is occurring. Fewer and fewer stocks are participating in the rally the further it rises, a pre-condition for a strong decline.                  

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2016, Main Line Investors, Inc. All Rights Reserved.


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