We all know by now divergence is when price and an oscillator are not confirming (making higher highs together). In the example below, you can see back in September of last year the US SP500 index made a higher high (1) while its momentum (upper pane) made a lower high (2). We also know that when divergence occurs, there is a high probability of a pullback/correction. We all know what happened next, the SP500 fell to its December, Christmas eve low, a 20% correction.

Since that low was made, the price of the SP500 has rallied back and made a new, higher high (3). What should have investors concerned is that, price momentum has made a … lower high (4). The same thing that happened last year. Notice how, in both divergence instances, the indexes price was above a bullishly aligned, rising 50 (green line) and 200 (red line) moving average which is indicative of a “strong bull market”.

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The higher probability outcome when divergences occur in “strong bull markets” are they turn into just “pullbacks” (buying opportunities) and NOT reversals. So, the fact we are seeing broad market divergence at the same time we are entering normal weak summer seasonality, I expect it’s likely we see another pullback in the coming weeks/months. As such, It’s likely not the end of the bull, rather just a normal (yes, 20% is considered normal) correction.  How big of one, is the $64,000 dollar question. Unfortunately, divergences don’t tell us the magnitude of any potential pullback but rather just of the increased probability of one occurring.