A Quick April 3 Peek Under the Hood of the Rally

Apr 3, 2012: 3:28 PM CST

I think a lot of traders have been surprised by the persistence of the “Creeper Trend” of early 2012 – along with many investors as well.

Let’s take a quick snap-shot peek at the inner-workings of Breadth, Volume, and the McClellan Oscillator to see what these classic “Market Internal” indicators reveal about the current rally as we move into April 2012.

Here’s a quick chart of the current S&P 500:

Let’s take this chart step-by-step.

First, we have the Daily S&P 500 from August 2011 to present in a candle-stick format with the standard 20 day and 50 day exponential moving averages (EMAs).

Under the chart is the classic colored (up/down) Volume indicator.

Here’s where it gets more detailed.  The McClellan Oscillator is a popular smoothed “Breadth” indicator which shows the difference between a 39 period and 19 period exponential moving average of net advancers (stocks positive on the session).

The McClellan Oscillator is built off the final indicator, Breadth or the NYSE Advancing Stocks (positive on the session) minus Declining Stocks (negative on the session).

We use Breadth – and the McClellan Oscillator as a form of “smoothed” Breadth – to assess the health or weakness (confirmation/non-confirmation) of a price trend in motion.

In general, Breadth or Internal readings are STRONGEST at the start of a rally and then deteriorate towards a much weaker relative level as the rally matures and eventually tops and reverses.

There are two points I want to highlight on the chart above:

1.  Breadth was STRONGEST during the October 2011 period where the market rallied strongly off the 1,100 bottom.

The strength in Breadth after a down-phase in the market clued us in to a potential stronger future for price – or at least that Market Internals were strong and supportive of a continued rally.

That’s a good lesson for the history books, which brings me to the next point:

2.  Breadth deteriorated throughout the strong rally and now is at lower relative highs while price continues its rally

We look for Market Internals to clue us into the strength of a trend in motion, and we have multiple sources of internals revealing “caution” or weakness.

First is Volume itself, which has steadily been trailing off after the strong pick-up (relatively speaking) also in October 2011.

With the exception of last month’s (March 2012) spike, volume has steadily declined as price continued its “Creeper Trend” (as I’ve defined in prior updates).

Not only has Volume declined over time, NYSE Breadth has as well – and by proxy the “smoothed average” of Breadth shown by the McClellan Oscillator.

What does that mean for us now?

At a minimum, now’s probably not the right time to get really excited to the bullish side and plunge in completely long – the time for that was during the strength in volume and Breadth off the October low and on subsequent retracements on the way up in November and December 2011.

On the other hand, we don’t YET have a confirmation breakdown in price to trigger a safe Short-Sale entry – that signal would likely trigger on a big move under 1,400 that carries below 1,375 or even 1,350 (depending on how you define a “breakdown” or trigger).

The situation now is the same it has been for the last few weeks and months – that of a persistent ‘creeper’ trend via Positive Feedback Loop as I’ve updated in prior posts for reference:

Mid-Week Check-up March 7” (retracement to support)

“The Intermarket Picture to Start March”

Triple US Stock Market Check into the Zone” February 14

Pulling Back to the Monthly Perspective in Stocks” February 7

Triple US Index Check on Push to New Recovery Highs” February 3

And there’s always the “Quick Lesson from Intraday Creeper Trends

We all must decide how to balance the fact of the ‘creeping’ price trend with the slew of negative divergences and caution signals – 2012 will be a great reference for this important concept.

Let price be your guide (movement above or beneath a key reference level) and indicators serve as information – not trading triggers.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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Comments
  • Richard Day

    Corey, I just wanted to add a note about your book on Amazon.  How is the 2 star review from the nitwit who never even read it and admits as much, allowed to remain in the customer reviews?  Does Amazon not delete such crap?

  • The review I think appeared the day the book was available for sale - impossible to read it and post a quality review the day the book is first made available.  I'm not sure - it's up to Amazon for what comments remain but it seems anyone can post any comment at any time - good or bad. Amazon also allows readers to rate comments themselves, moving comments up or down accordingly and that's fair.

  • Richard Day

    He says upfront that he never read your book.  That alone should be grounds for deletion.  18/86 customers find his "review" useful so that should be embarrassing enough for him.

  • Given the strong pullback following the strong breadth in October, was your advice to buy the market at the cheaper prices. On a related note, shouldn't we expect at least one last big push after this weaker breadth as traders pile more and more into the big winners in the major indices?

  •  Good question!  The November pullback happened to stop/find support at the 61.8% retracement and December in general is historically bullish.  I'm not one to try to buy as low as possible, but instead as price breaks a falling 'flag-like' trendline particularly as seen clearer on a lower frame. 

    Arguably the best buy - one that triggered popped stops/short-squeezes - was on the confirmed breakthrough above the whole consolidation above 1,275 and especially 1,300.

    Regarding one final push - no one can tell for sure but I'm assuming a lot of traders are logically bearish and yes will capitulate out should price start ticking higher and higher, breaking on to further new recovery highs... though 1,440 is the critical target I'm watching on any upward move.

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