Three Bull Market-Friendly Divergences

by Donald Harder

Predictions are of that mental substance that your mother warned you would make you go blind if you engage in too much of it, so we are not in the business of making predictions.

With that in mind, three charts that likely encapsulate the potential for stocks to rise or fall more than anything else out there are the treasuries $TLT, the dollar $UUP, and the Euro $FXE.

All three of these charts display divergences, which could have important implications for stocks as we move into 2012.

First, the treasuries $TLT, which displays a stark negative, or bearish divergence on its accumulation/distribution line:

Next up, is the dollar $UUP, which has a clearly negative, or bearish A/D divergence as it bumps up against weekly resistance:

Finally, the hated Euro $FXE, which shows accumulation going all the way back to mid 2010, and is now displaying a slight positive, or bullish divergence on its latest downswing:

Inverse Correlation Between Stocks and Treasuries

So why are these divergences potentially important and what do they have to do with stocks?

In the interest of keeping things relatively simple, as Michael Davey, AKA Centrifugal, points out, in recent market history, stocks fall as treasuries rise and vice versa. If $TLT is topping out here, it’s a pretty good bet that stocks are going to benefit if and when TLT reverses course.