Market technicians like to look for divergences as a signal that a market is about to reverse course. A divergence is a situation in which the market price moves to a higher high (for example) but other indicator of technical strength or weakness (e.g. an oscillator) refuses to "confirm" and instead makes a lower high. Such action is usually interpreted as bearish.
My technician friends tell me that the stock market is showing all kinds of bearish divergences now. For example, they are pointing to the chart of the NYSE advancing issues above and pointing out that the black line which records the daily count of advancing issues failed to confirm the new high in the S&P earlier this week. Of course the only oscillator I care about is the red line, the 10 day moving average of advancing issues, and this did make a new high this past week.
My experience is that divergences are sometimes useful for detecting the end of reactions against the direction of the main trend but they can get you into big trouble by inviting you to fade the main trend prematurely.
The technical types have been fading divergences at temporary highs of this bull market for 16 months now and have been rewarded handsomely for doing so. I think they are about to give back their hard-earned profits because the stock market is about to accelerate to the upside and wipe out the bearish divergences everyone is talking about now.
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