Last Thursday, the SPY was still pushing into new all-time highs, supported by strong earnings, cooler inflation and lower Treasury yields.
At the time, the trend remained bullish—but there was one warning sign worth watching: a potential bearish divergence developing beneath the surface.
That divergence suggested that while the SPY was making new highs, momentum wasn’t necessarily confirming the move. In other words, buyers may have been starting to lose some steam.
Since then, the SPY has pulled back from those record levels.
So, was the divergence giving us an early warning?
The Bearish Divergence Begins to Matter
A bearish divergence occurs when price continues making higher highs while a momentum indicator begins making lower highs.
It doesn’t guarantee that the market is about to reverse. But it can tell traders that the strength behind the move may be weakening.
That’s why it was important to pay attention to last week’s setup.
The SPY was still moving higher, but momentum was beginning to tell a slightly different story.
Now that prices have backed away from the highs, that divergence becomes more meaningful.
Is the Rally Over?
Not necessarily.
Markets rarely move higher in a straight line. After a strong advance, periods of profit-taking, consolidation and short-term weakness are completely normal.
The larger trend can remain bullish even while the SPY experiences a pullback.
The question now is how the market responds to that weakness.
Watch for Buyers Near Support
The next clue may come from how aggressively buyers step back into the market.
If the SPY finds support, stabilizes and begins moving higher again, the current decline could simply be a healthy reset within the broader uptrend.
But if selling accelerates, momentum continues deteriorating and important support levels begin breaking, traders may need to become more cautious.
Market breadth will also be important. A pullback becomes more concerning when weakness spreads across a growing number of stocks and sectors.
The Bigger Picture Still Matters
Several of the forces that helped drive the rally remain important.
Strong corporate earnings can continue providing fundamental support. Cooler inflation could keep pressure off interest rates, while contained Treasury yields would remain favorable for growth and technology stocks.
If those conditions remain constructive, buyers may eventually view weakness as another opportunity.
But if yields rise sharply or economic expectations begin changing, the market could face a more difficult test.
What Happens Next?
Last week’s bearish divergence didn’t tell us exactly when the SPY would pull back.
What it did tell us was that the market’s momentum deserved closer attention.
Now that the SPY has retreated from record highs, we’ll be watching whether buyers defend support, whether momentum begins improving and whether the broader bullish trend remains intact.
Is this simply a healthy pause—or the beginning of something more significant?
That’s what we’re watching in this week’s Market Minute.