Study: the stock market is forming a bullish divergence


We mentioned before that the stock market is forming a bullish breadth divergence. You can clearly see this with the Advance-Decline cumulative line, which is making “lower highs” even though the S&P 500 is close to retesting its February 9, 2018 lows.

Hayes Martin from MarketExtremes.com found 8 similar cases since 1950 in which the S&P 500 formed a bullish divergence such as this in momentum and breadth indicators. Here are those historical cases, and here’s what happened next to the U.S. stock market.

  1. February 11, 2016
  2. October 16, 2014
  3. October 3, 2011
  4. March 9, 2009
  5. October 11, 1990
  6. December 4, 1987
  7. December 6, 1974
  8. October 7, 1966

Here’s what happened next to the S&P 500

February 11, 2016

This bullish divergence happened at the exact bottom of the S&P 500’s 15.2% “significant correction”. The U.S. stock market soared throughout the rest of 2016 and 2017.

October 16, 2014

This bullish divergence happened 1 day after the S&P 500 ended its 9.8% “small correction”. The S&P’s next “significant correction” started 7 months later.

October 3, 2011

This bullish divergence occurred one day before the S&P completed its 21.5% “significant correction”. Then it promptly started to rally upwards in a very volatile manner.

March 9, 2009

This occurred a few days after the 2007-2009 bear market ended. The S&P 500 soared throughout the rest of 2009.
This historical case does not apply to today because we are not at the bottom of a bear market or recession.

October 11, 1990

This bullish divergence happened at the exact bottom of the S&P 500’s 20.3% “significant correction”. The S&P soared throughout the rest of 1990-1991.

December 4, 1987

This bullish divergence happened during the retest wave for the October 1987 crash. This marked the exact bottom of the retest wave. The S&P 500 rallied from 1987-1990.

December 6, 1974

The S&P 500’s 1973-1974 bear market bottomed in October 1974. This bullish divergence happened during the retest wave that ended on December 9, 1974. As you can see, this signal came very close to marking the bottom of the retest wave. The S&P 500 soared throughout 1975.
This historical case does not apply to today because we are not at the bottom of a bear market or recession.

October 7, 1966

This bullish divergence occurred 1 day before the bottom of the S&P’s 23.6% “significant correction”. The U.S. stock market surged throughout the rest of 1966 and 1967.

Conclusion

This is a clear medium-long term bullish sign for the U.S. stock market. It implies that the stock market’s short term bottom is either ALREADY IN or is very close. The short term downside is limited, and the medium term risk:reward heavily favors bullish investors.

3 comments add yours

  1. The normal chart has the Gap Up & Down, while the A/D line doesn’t take it into account. So not quite sure the comparison is valid

  2. Wow.
    I get two things from this:
    1. The recent market correction is basically over.
    2. Bullish for the next few months—should not be surprised if the market is at least 7 percent higher 6 months from now.

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