In financial markets, trends and signals play a critical role in investment decisions. Among these trends, divergences, particularly bearish ones, provide same invaluable insight for investors. These divergences, which arise when price trends vary inversely with momentum indicators, suggest an impending downside reversal. In the context of growth stocks, which hold the promise of above-average stock market returns, the detection of a bearish divergence can be a significant warning to investors. Two such key growth stocks currently presenting bearish divergences are Alphabet Inc. (GOOGL: NASDAQ) and Netflix, Inc. (NFLX: NASDAQ), both prominent players in the tech industry.
Alphabet Inc., the parent company of Google, has been a formidable domain in the growth stock landscape due to its seemingly unstoppable business model and continual expansion into wide-ranging technological sectors. However, a deeper examination of its stocks’ technical analysis reveals a burgeoning bearish divergence. Throughout 2020, Alphabet’s stock price experienced a rising trend, consistent with many other tech stocks. However, moving into 2021, despite the continually rising price, the momentum, as measured by Relative Strength Index (RSI), shows a downward trend. The RSI, a momentum oscillator, compares the magnitude of recent gains to recent losses in an effort to ascertain overbought and oversold conditions of a particular asset. When the RSI starts to drop while prices still rise, it is a clear indication of a bearish divergence, suggesting a possible future price drop.
Similarly, Netflix, a dominant figure in the streaming industry, has demonstrated a persistent growth trend. It showed an impressive revenue increase throughout 2020 when demand for home entertainment soared due to the global pandemic. However, a peek into 2021 reveals a bearish divergence unfolding within the company’s stocks. While Netflix’s stock price continues to steer upwards, its Moving Average Convergence Divergence (MACD) has been on a steady descent. The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. When the MACD starts to decline as prices rise, it is a bearish divergence, pointing towards the possibilities of a price correction.
Investors often rely on the concept of divergences for investment decision-making as they are usually the first sign of a possible trend reversal. Thus, the bearish divergences observed in Alphabet and Netflix, both significant growth stocks, should be approached with caution. However, investors should keep in mind that these divergences do not always guarantee a price reversal and are only one piece of the broader market analysis.
Trading based solely on divergences can be risky, as divergences can last longer than some traders’ financial ability to stay in the market. Therefore, it is advisable for investors to apply divergences alongside other technical analysis tools and methods to heighten the potential success of their investment strategies. Also, given the inherent risks associated with growth stocks – including high valuation levels and increased volatility – one must always remember the importance of a diversified investment portfolio to hedge against potential losses.
Even though bearish divergences signal caution, it is necessary to consider other market influences, such as economic factors or company-specific news, that may have a significant impact on stock prices. In the world of investing, prudence, extensive analysis, and diverse strategies remain the most potent weapons for success.
