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Negative Divergences Could Wreak Havoc On U.S. Stocks
By: Tom Bowley | March 19, 2019

U.S. stocks moved modestly higher on Monday, extending Friday breakouts on both the S&P 500 (+0.37%) and NASDAQ (+0.34%). The Russell 2000 gained 0.67% to lead the action. Crude oil prices ($WTIC, +1.47%) topped $59 per barrel as energy shares (XLE, +1.39%) were atop the sector leaderboard. But it wasn't all about energy. Financials (XLF, +1.01%), industrials (XLI, +0.97%) and consumer discretionary (XLY, +0.97%) - three aggressive sectors - all performed exceptionally well. The laggards were primarily defensive groups, although the worst performing sector was communication services (XLC, -0.85%), dragged down by Facebook (FB, -3.32%) and a weak internet group ($DJUSNS, -1.04%). FB needs to be monitored closely as it's on the verge of losing price and 50 day SMA support:



FB broke down on a relative basis, so if it loses its current price and 50 day SMA support, look next to gap support being filled near 150.

One interesting development on Monday was the breakout of broadline retailers ($DJUSRB, +1.65%). Amazon.com (AMZN, +1.74%) finally cleared its range of congestion and we know what happened to both Apple, Inc. (AAPL) and Alphabet (GOOGL) when they cleared price resistance. They kept rallying. Here's a current look at AMZN:



AMZN has a couple more price levels to clear, but you can't reach the second or third price resistance level without clearing the first one. Momentum appears to be strengthening and I would expect to see more momentum traders jumping on this bandwagon.

One last note. The Federal Reserve starts its latest meeting this morning with its policy statement to be released on Wednesday at 2pm EST. I highly doubt we'll see a change in the fed funds rate, but traders will be looking for the Fed to provide an update regarding possible future hikes - how many and when.

Pre-Market Action

Asian markets were mixed overnight, but there's a solid bid in Europe this morning with the German DAX ($DAX) up more than 1% at last check. Crude oil ($WTIC) is fractionally higher, while the 10 year treasury yield ($TNX) has spiked 3 basis points to 2.63% ahead of the Fed meeting.

U.S. futures look solid this morning with Dow Jones futures higher by 91 points with 30 minutes left to the opening bell.

Current Outlook

There are negative divergences emerging all over the stock market, but let's just focus on the benchmark S&P 500 for now. First, check out the daily chart:



Overhead price resistance near the 2817 level was finally cleared. That's the good news and really shouldn't be taken lightly. But failure to hold that breakout with a negative divergence in place would not be good news at all for the short-term, so watch 2817 closing support. That potential failure could lead to a retest of the 2725 price level where buyers returned on March 8th.

A further red flag is the negative divergence that the S&P 500 has printed on its hourly chart:



Listen, negative divergences do not guarantee us anything. They simply warn us of higher risks. Therefore, if you're a risk averse short-term trader, then these are signs that should concern you. If you're a long-term trader or someone who buys and holds for longer-term capital appreciation, then I'd mostly ignore these signs as I believe the market goes higher as we look further down the road...

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