Bearish divergence: Investors advised not to buy on dips

By MoneyTimes

Sep 07, 2015 09:46 PM EDT

Going the by technical charts on S&P 500 index movement, the formation of 'Bearish Divergence' is a warning signal for investors not to take any fresh positions. The relative strength index (RSI) is moving downwards when equity prices are trending higher.

This clearly shows weakening of the upward move. The formation of bearish divergence need not to be a confirm signal that investors should sell, but it's a warning signal for investors to be cautious. It'll be more alarming if the index breaks down key support level. The S&P 500 broke below the support level i.e. January low. S&P 500 index shed 1.53 percent to close the week at 1,921.22 points. 

Confirming this, the RSI is also showing downward movement, while prices were moving up. If a bullish trend accompanied with a bearish RSI, then it's a clear signal for bearish divergence, which means, the bullish trading is losing steam and it could reverse the direction anytime.

'Bearish Divergence' is a situation, in which two technical indicators move in opposite directions. This signals that a turning point in the trading pattern is very much in the near-term only. Technical analysts give more thrust to movement of price and its RSI to know exact divergence. 

According to, monthly charts on Dow Jones Industrial Average index indicate that RSI showing triple bearish divergence at the high. The MACD indicator is also showing a triple bearish divergence at the high. 

The weekly charts for 2015 trading, RSI is also showing quadruple bearish divergence at the top and MACD showing quadruple bearish divergence at the final high. 

This is confirming that market is poised for a major drop in the near term, forecast technical analysts. 
The bearish divergences as the Market Technicians Association describes as most bearish type i.e. Class A bearish divergence. S&P 500 shed 1.2 percent on Friday after the positive news that August job growth data released. 

The ongoing adverse conditions in the global markets are also indicating further bearish tone among the investors. Investors are looking for clues as the uncertainty has gripped the global markets. The US Federal Reserve's decision on interest rate could give clarity for the US investors. 

Monday is holiday for equity markets on account of Labor Day. The trading on the US bourses was below the three-month average. 

September is historically a bad month for S&P 500. After the three days of weekend, how the markets will open on Tuesday, and one has to watch, opine analysts.  S&P 500 index recorded loss of over one percent for six times in the past 12 days. 

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