Positive divergences in some technical indicators suggest rally potential that is largely unexpected, prompting selective new buying in health care stocks and profit taking in a popular inverse ETF.
Global sentiment for stocks early Monday was almost as negative as it was last October with sharply lower trading before the NYSE opening. In early trading, the S&P futures were down over ten points from Friday’s close, but then managed to close the day with just minor losses.
As I noted here last week, not all of the regular sentiment readings are currently negative enough to suggest a major market low, although the financial media has been painting a dire picture.
More importantly, if the positive divergences in many of the technical indicators—especially the market internals—are confirmed, it will favor a rally that is much stronger than the bears expect.
Stock index futures are higher before the opening Wednesday, and confirmation of the positive divergences could occur before the end of the week.
We have been doing some light buying recently and have two new recommendations in the health care sector. We will also look to take some profits on an inverse ETF position.
Chart Analysis: The daily chart of the Spyder Trust (SPY) shows a pattern of lower lows, line b. The 38.2% support level at $128.92 was violated last week, as was the still-rising 200-day moving average (MA).