Divergence at the Top
Lessons from DIA & SPY
Friday saw a broad-based move higher following four straight days of bearish action. Thursday’s selloff had become fairly overextended, so a bounce was likely—but the key question now is how long it will last.
SPY, QQQ, DIA, and RSP are all telling slightly different stories right now, which makes forming a clean, cohesive market thesis difficult. Where they do align, in my view, is that even if we see another month or two of bullish price action, it is likely part of a topping process rather than the start of a fresh leg higher.
While Friday’s rally relieved short-term oversold conditions, the bigger-picture setup continues to argue for caution. DIA breaking out to new highs while SPY and QQQ lag is a historically important divergence. At market highs, DIA–SPY divergence has most often signaled rotation and distribution rather than broad-based risk expansion, increasing the odds of consolidation or a corrective phase unless growth leadership reasserts itself.
Market tops rarely occur all at once unless triggered by a true black swan event, like COVID—and even then, warning signs appeared months in advance. The underperformance of the Mag 7, weakness in software, high-beta tech topping months ago, Bitcoin in a bear trend, and metals rolling over all point to growing internal fragility. At some point—likely sooner rather than later—a deeper flush seems probable, pushing the market lower and retesting the April–October range. I’m not calling for an all-out crash, though anything is possible. In midterm years, however, a 10–15% correction in SPY and QQQ would be normal and healthy, particularly after the magnitude of the rally we’ve just seen.
Let’s look at each index in isolation, starting with QQQ.
QQQ remains the weakest of the major indices. Last week it broke below the 100-day SMA and closed firmly beneath it. This breakdown followed three months of repeated failures at the $630 resistance level and a final failed breakout attempt. Even Friday’s big rally only managed to retest the 100-day SMA and the broken trendline from below.
QQQ has reached the 1.618 extension of the 2025 tariff drop, a Fibonacci level that historically acts as strong resistance and is proving to do so again. The amount of overhead resistance between $613.00 and $630.00 is substantial, and if price pushes back into that zone, I would expect it to struggle and chop. The most likely path, based on this chart, is a move back toward $570 or lower. A flush into that area would help reset elevated AI expectations and likely create a more attractive long-term buying opportunity in tech.
QQQ Daily Chart
SPY is telling a slightly different story. It has also reached the 1.618 extension of the tariff drop, as well as the 2.618 extension of the 2022 bear market. That combination represents significant resistance, and price has reacted accordingly. Unlike QQQ, however, SPY has held its 100-day SMA and continues to grind to marginal new highs, making higher highs and higher lows since the October 29th QQQ peak.
That said, the move higher has been muted and accompanied by waning momentum. Strength has largely come from market broadening rather than leadership. If SPY does manage to hold its 100-day SMA and break out, my primary upside target is the $714 area, which marks the 1.618 extension of the November 2025 drop. From a risk-reward standpoint, however, upside here remains limited. Either SPY pushes toward the $710–$720 zone over the next month or two, or we continue chopping sideways before eventually losing the 100-day SMA. Viewed alongside QQQ, risk still appears elevated.
SPY 3 Day Chart
DIA is showing the most bullish action in the short term, breaking out to new all-time highs on strong volume. But is this signal as bullish as it first appears? Not entirely. This divergence is significant because it aligns with a recurring historical pattern: when DIA leads at while SPY and growth lag, it more often reflects defensive rotation than the start of a broad bullish expansion that carries the markets notably higher.
DIA Daily Chart
I went back through historical data to see how similar divergences have played out. The most recent example occurred on November 11th, 2025. DIA made a higher high while SPY put in a lower high, and the market quickly rolled into a roughly 5% correction, with both indices falling to their 100-day SMAs.
The divergence played out on December 13th, 2022, which marked the high before a three-month, 10% correction, and again on February 23rd during that same corrective phase, preceding another leg lower. April 21st, 2022, saw a comparable divergence just before a sharp 16% waterfall decline, and February 9th, 2022, marked a divergence that signaled the high of another bear-market bounce.
The one notable divergence that resulted in decently bullish follow-through and not a 5%+ correction occurred on February 24th, 2021. That breakout shared some similarities with Friday’s move, including consolidation near all-time highs followed by a strong bullish candle breakout. In both cases, divergences appeared after ultra-strong recoveries from steep sell-offs. Even in that more bullish scenario, DIA still pulled back just over 4.5% in the days that followed before resuming its longer-term uptrend. See, I said it didn’t have a 5%+ correction.
The final example worth mentioning occurred in early October 2018. SPY made a clear lower high after topping on September 20th, while DIA pushed to new highs on October 3rd. That divergence preceded a steep and violent 20% drawdown into the December 2018 lows.
Scanning back to 2015, I found seven notable instances where DIA showed relative strength versus SPY. In every single case, a drawdown of at least 4.5% followed immediately, and only one led to sustained upside before a meaningful pullback. While the 2021 example might seem most similar to today’s environment, when considered alongside broader QQQ weakness and deteriorating growth leadership, the current setup leans more toward caution—especially if DIA were to take out Friday’s bullish candle in the coming week.
Until growth and technology regain leadership and confirm new highs alongside SPY, rallies should be treated as higher-risk and managed with an emphasis on discipline and risk control rather than aggressive positioning.
DIA and SPY Divergence
