I wanted to point out the recent action in the Dow Jones Utilities Index – it is a lesson on how momentum divergences play out.

First, the chart:

I have not annotated this chart (with trendlines) to show the divergences – note both oscillators making lower swing highs while price makes increasingly higher highs.

Divergences in momentum tend to correct down to where the momentum divergence (on the 3/10 Oscillator – bottom pane) first was observed.  Even the trusty stochastic indicator made clearly visible divergent patterns.

It is a known theorem from the Fathers of Technical Analysis to Linda Raschke and others today: Momentum Precedes Price.

This occurs both in the form of momentum highs leading to new price highs (indicated also on this chart with a new price and momentum high on March 26th) and the form of divergences, which are nothing more than a coming balance of buyers and sellers (and a reversion to the mean type of price behavior). This is evident with the ’snap’ decline and rolling upper peaks in price throughout the month of May.

Now, we are observing new momentum lows and a potential “Impulse Sell” style trade where momentum makes a new low, corrects back upwards, and then makes new price lows. This could happen with a failure test of the (now) declining 20 period moving average.

Study your charts in terms of momentum readings and indicators. They are not the ‘magic bullet’ of course, but they can alert you to some greater than normal probabilities of potential upcoming price movement.

Of note, we are seeing clear momentum divergences just like this in the major indexes. I recommend caution, but I do not attempting to short this market yet.