Trends hint there's a bear in there
The chart - produced by Robert Brain, a member of the Australian Technical Analysts Association - shows the weekly trajectory of the All Ordinaries Index against its momentum indicator. If a market is rising and the amounts by which it is rising are growing, the momentum indicator trends upwards. If a market is rising but by declining increments, the momentum indicator will trend downwards. The inverse is the case in declining markets.
When the momentum index in a rising market is falling, a fall in the market is said to be imminent. Such a pattern is known as "bearish divergence". From March to May the All Ords rose slightly from point A to point B. But the momentum indicator failed to make a higher high, with point D on the momentum chart being above point E. Bearish divergence had emerged and the market fell nearly 11 per cent in four weeks.
Between May and late July the All Ords recovered but did not hit its May highs. So point C on the chart is a "lower high". Meanwhile, the momentum indicator made a much lower high at point F. With the All Ords climbing a little higher from point C we can say that bearish divergence is back.
Inter-market analysis of the German DAX index and its momentum indicator show both moved higher in a choppy period between March and May then fell away, as did the Australian market. The DAX then returned to its highs in July and August, but its momentum indicator fell sharply to July and is still at low levels, indicating there may be upcoming weakness in the DAX. Recent downward trends have been seen in some other important markets as well.
All that international weakness lends weight to the negative implications of the bearish divergence in the All Ords. Such bearish divergence was present before the downturns in 2008, 2011 and 2012.
This column is not investment advice. rodmyr@gmail.com
Frequently Asked Questions about this Article…
A momentum indicator measures the rate of change in a stock or index price over time. If a market is rising and the amounts it’s rising by are increasing, the momentum indicator trends up; if the rises are getting smaller the indicator trends down. The inverse applies in falling markets. Used alongside price charts, momentum helps investors see whether a move is accelerating or losing steam.
Bearish divergence occurs when an index or stock makes a higher high in price but the momentum indicator fails to make a corresponding higher high. That gap can signal that upward momentum is weakening and a fall in the market may be imminent. The article notes bearish divergence preceded significant declines in the past, so it can be a useful warning sign for investors.
Between March and May the All Ords rose slightly from point A to B, but the momentum indicator didn’t make a higher high (point D was above point E), signalling bearish divergence. The market then fell nearly 11% in four weeks. Later, between May and late July the All Ords formed a lower high at point C while momentum made a much lower high at point F, indicating bearish divergence returned.
The article describes the DAX moving higher in a choppy period from March to May then falling, similar to the Australian market. The DAX returned to highs in July and August but its momentum indicator fell sharply into July and remained low, suggesting potential upcoming weakness in the DAX. Recent downward trends in other important markets were also noted.
Yes. The article says international weakness — such as weakening momentum in the DAX and other markets — lends weight to the negative implications of the bearish divergence seen in the All Ords, making the warning signal more persuasive.
According to the article, bearish divergence was present before past downturns in 2008, 2011 and 2012, indicating it has been a recurring early warning in major falls. That said, the article presents it as an indicator of potential weakness rather than a guaranteed predictor.
The article suggests treating momentum signals and inter-market analysis as warning signs to monitor closely. It highlights the presence of bearish divergence and international weakness as reasons to be alert, but it does not prescribe specific investment actions—rather, use these signals as part of a broader review of market conditions.
No. The article explicitly states that the column is not investment advice.
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