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What is a Positive Divergence?
Technical View
Andrew J. Burkly, CFA, CMT
212.493.8964
[email protected]
Important Disclosures on page 5
http://equitystrategy.bbh.com
November 11, 2008
Ari H. Wald, CFA212.493.8997
[email protected]
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Technical View
Last week we noted that if the S&P 500 moves back toward (or
through) its October 10 th intra-day low of
839, the most bullish development would be evidence of positive
divergences developing with the internal
indicators. This prompted several client inquiries asking
exactly what is a positive divergence? The short
answer is any indication that the bear is running out of
strength and selling is becoming incrementally more
selective. Such examples would include less new 52-week lows,
the advance-decline line bucking its
downward trend, lesser-capitalization indexes showing relative
strength, and/or a lower peak in the CBOE
Volatility Index (VIX), just to name a few. Essentially, if
October 10th was the bang, now we need to see
the whimper. The bottom in 2002 was a classic example of this
process.
On page 3 we show the S&P 500 Index and two intensity
indicators during the 2002 bottoming process when
the index tested the bottom of its range three times in July
2002, October 2002, and March 2003 . While the
price low was set in October 2002, the July decline actually
marked the internal low of the cycle, or the
bang. At the internal low, only 3% of stocks were trading above
their 10-week average and 839 NYSE
stocks made new 52-week lows. Although the S&P 500 price
line undercut its July low in October of that
year, the internal indicators made higher lows, i.e. a positive
divergence. When the S&P 500 made its final
retest in March 2003, 8 months after its internal low , the
indicators were already in a confirmed uptrend.
In our view, October 10th, 2008 had the high-intensity feel of
an internal low like July 2002. At its lowest
level, only 3% of stocks were trading above their 10-week
average and a record 1688 NYSE stocks made
52-week lows (page 4). If bullish internal divergences develop
if and when the S&P 500 moves back toward
(or through) the bottom of its range we would view that as a
bullish sign stay tuned.
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01000
Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03
Jul-03 Oct-03 Jan-04 Apr-04
S&P 500 Index
800
900
1000
1100
1200
1300
% of Stocks Above their 10-week m.a.
0
20
40
60
80
100
NYSE 52-Week Lows
0
100
200
300
400500
600
700
800
900
2002 Bottoming Process Took 8 Months
July 02 was theinternal low orbang
Oct. 02 was the
price low
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02000
Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Jul-09 Oct-09 Jan-10 Apr-10
S&P 500 Index
800
900
1000
11001200
1300
1400
1500
1600
% of Stocks Above their 10-week m.a.
0
20
40
60
80
100
NYSE 52-Week Lows
0
200
400
600
8001000
1200
1400
1600
1800
2008 Bottoming Process is Only on Day 23
Look for positivedivergences
?
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