The textbook definition of convergence is when two or more things come together to form a new whole. It is also the act of converging and moving toward union or uniformity.
In finance, trading, and economics, divergence and convergence denote the relationship between two trends, prices, or technical indicators. The two terms refer to how these variables move in regard to each other.
Divergence signals two trends, prices, or technical indicators, moving further away from each. While convergence signals move closer together.
The two S&P 500 Index (SPX) moving averages, namely the 50-day ma (3,909.21) and the 200-day ma (3,987.35) have converged toward their apex.
The spread is currently 78.14, as it trades at the tightest level since March 2022. A recent death cross-sell signal ignited the Apr-Jun 2022 selloff of 1,000 points, resulting in a 21.6% market decline.
If one were to extrapolate the convergence of the two moving averages, it suggests one of the two scenarios. Scenario 1 hints at a bullish golden cross buy signal, where the 50-day ma crossed above the 200-day ma. Scenario 2 warns at bearish death cross-sell and the rolling over of the two moving averages. The 50-day ma fails to cross above the 200-day, resulting in the rolling over or downtrending of the two moving averages.
As early as the next 2-4 weeks, the outcome will help decide the next SPX directional trend.
A golden cross-buy with the 50-day ma crossing over the 200-day ma, coupled with a convincing surge above 4,053 (Aug 2022 downtrend) and 4,095-4,119 (Sept and Dec 2022 highs), confirms a bullish recovery. The positive development reaffirms an SPX recovery toward 4,319-4,325 (8/16/22 reaction high and the top of the Sept/Oct 2022 uptrend channel). A higher-high above 4,325.28 reaffirms a 1-year downtrend reversal and hints at a retest of the Jan 2022 all-time high (4,818.62).
On the other hand, a failed golden cross buy coupled with the rolling over the moving averages warns of a market decline. The bottom of the Sept/Oct 2022 uptrend channel (3,827) and the 12/22/22 low (3,764.49) offer initial support. A violation warns of a retest of the 10/13/22 reaction low (3,491.58). A lower low reaffirms the resumption of the primary 1-year downtrend. Under the worst-case scenario, it warns of a repeat of the two prior bear market declines of 2000-2002 and 2007-2009.
There are striking similarities developing between the current 1-year bear market and the 2000-2002 Tech/Telecom dot.com and the 2007-2009 Global Financial Crisis/Great Recession bear markets. It was uncanny that the first death cross-sell signal warned of the onsets of the two previous bear markets. However, it was the second sell signal via a failed golden cross buy signal that led to the rolling over of the 50-day and 200-day moving averages and ignited the acceleration of the two respective bear market declines, leading to climatic market bottoms.
It appears the current trading pattern of SPX closely resembles the 2000-2002 Tech/Telecom dot.com bear market more so than the 2007-2009 Global Financial Crisis/Great Recession.
The market actions over the next 2-4 weeks will help decide if this is the start of another structural bear/trading range market trend or the resumption of the structural bull.