Divergence can be a really powerful technical indicator. I will always remember a call made by one of my favorite technicians, Carter Worth in March of 2009. At that point, the S&P 500 was making a new low, but the semiconductor ETF SMH, was not making a new low.
That divergence showed that aggressive sectors were not confirming the new lows made by the broader index and sure enough markets bottomed from there and went on a nearly 10-year bull rally.
Back on March 26th, I pointed out a similar divergence that was occurring between crude oil and the energy ETF, XLE .
Crude oil had bottomed and then rallied nearly 13%, but XLE had only rallied 6%.
I argued that “Either the market doesn’t buy the global growth story and WTIC will fall back in line with XLE; or, XLE will play catch up and rally strongly to get back in line with the rally in crude.”
Since then XLE has rallied from $73 to $78 and XOM has gone from $74 to $81.60.
In the March article, I looked at a covered call trade in XOM that has since gone on to achieve a 7% return in just under two months.
Keep an eye out for divergences like these, they happen pretty regularly and can provide great trading opportunities.
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