Bullish Divergence and Strong Seasonality
Igor Manukhov - Nov 07, 2022
Momentum and price divergence along with what is historically a good end of the year for stocks suggests that we might get a relief rally soon.
To say that last week was crazy would be an understatement. We routinely get 2% reversals on the market and yesterday we got a whopping 5% market reversal. Most market participants, myself included, expected that the market would selloff if inflation was high and would rally if inflation was low. Well, inflation was high, and the market rallied in response. Whether this is a one day wonder or the start of a new uptrend is unclear at this point (I learned my lesson not to predict the bottom). After all, we still have high inflation and a very strong labor market, which suggests that the FED is not done raising rates just yet.
Its not all bad news however. While on the surface the markets have been selling off, momentum (as measured by RSI and MACD indicators) has been slowing down and forming a bullish price divergence. Divergence is a setup when price and momentum move in the opposite direction, which suggests that there might be a reversal of trend in the short term. In our case, we have a bullish divergence; price has been making new lows, while RSI and MACD are trending higher (pink lines on the chart). A similar setup took place twice earlier this year (see the blue lines on the chart) and both times we had a rally. Historically markets are quite strong in November and December, especially after elections and poor performance earlier in a year. It appears that we have a pretty good chance to see a rally of some sort into the end of the year.
