On October 7, 2011, I wrote a blog post describing a bullish divergence forming in the Financial Sector SPDR. I used the Relative Strength Indicator to measure momentum and the price of the XLF to show that although the XLF made a new price low, the indicator did not confirm the drop. I could have used other indicators and equity positions, and the result would have been the same.
In the chart below, I use the S&P 500 SPDR (SPY), and the indicator is the Moving Average Convergence Divergence Indicator (MACD). In this chart, we’re seeing the reverse phenomenon — called, appropriately, a bearish divergence — marked by the two red lines. The price of SPY reached a new high last week, but the MACD failed to register a new high. This is a sign that a change in trend may once again take place.