A Checkup on NASDAQ Market Internal Divergences July 15

While I usually post updates on the S&P 500 market internals, I thought it would be helpful to branch over to show the structure of NASDAQ-specific market internals on the tech index.

Here is the current status of Market Internals on the NASDAQ Index:

For background on why Market Internals are important and how to interpret them, check out my post:

“Market Internals Matter:  A Look Through June 2010”

The three internals above are all NASDAQ-specific, as in Breadth, TICK, and Volume Difference.

I posted recently on the S&P 500 Divergence in Internals from July 8-12, though the surprise earnings on Tuesday broke the indexes above resistance and price overruled the divergences – an important lesson in failures… or delayed resolutions.

This is a very important lesson in that you cannot just “Monkey See, Monkey Do” in terms of “Oh, there’s a divergence so I’ll immediately get short.”

Divergences do not work that way – it’s not that easy!  Though I wish it were.

Divergences in market internals show conditions ‘under the hood,’ or reveal trend strength (confirmation) or weakness (divergences).  Weakness does not mean reversal, though the longer the market stretches higher on declining divergences, the greater the probability for a market reversal becomes.

That being said, yesterday’s new NASDAQ high was clearly undercut again by declining market internals.

So, once again, we have a caution signal for the bulls and a potential developing opportunity for the bears, but after all, price is king and we still must manage risk in the positions we have.

Markets overextended on internal divergences increase risk for both bulls and bears:

For bulls, the market could decline and reverse at any moment, so being long is risky.

For bears, the market could continue overextending despite divergences, leading to a ‘slow creep’ against your position.

The resolution comes with a definitive downside break in price – perhaps occurring this morning – or a pick-up (rise) in internals to support the price.

Watch closely as this situation unfolds.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade