A Quick Warning from October 15 Divergent Market Internals

Oct 15, 2013: 10:58 AM CST

In conjunction with this morning’s post regarding the midpoint of a Linear Regression line currently intersecting the 1,715 index level, let’s also take a look inside the market at the “guts” or Big Three Market Internals which are flashing a caution signal after three days of intense upside price action.

SP500 S&P 500 Market Internals TICK Breadth VOLD Volume Difference Divergence

A quick view of the 15-min intraday internals graph shows all three major internals (NYSE Breadth or “Advance/Decline”, NYSE TICK, and NYSE VOLD or Volume Difference of Breadth) show a persistent divergence or non-confirmation as each day of the current rally has progressed.

We use Market Internals as a confirming indicator especially when price rallies or breaks through a resistance level – we want to see internals spike to new highs as well as was the case on October 10th’s strong price and strong internal action.  It “forecast” greater odds for price continuation to the upside which is exactly what occurred.

On the other hand, we look for Divergences as Non-Confirmation signals of potential – not guaranteed – intraday price reversals as was the case on October 9th into the “spike” or V-Spike inflection low.

That’s what we’re seeing currently with a check-up on price vs. internals – non-confirmation or divergence.

This doesn’t mean the market is required to reverse lower, but it does mean that odds have deteriorated to expect additional non-stop upside action without a ‘break’ or pause (retracement) after three days of strong money flow or upward price impulse.

We’ll still need price itself to confirm – and we’ll continue to keep our focus on today’s horizontal resistance shelf into the 1,710 area.

Similar to yesterday’s action, any additional upside action ‘should’ trigger stop-losses of short-sellers (with tight stops) which would contribute to additional upside pressure as bulls step in to buy the new ‘breakout’ high.

If so, monitor internals on that breakout for signs of strength or else a continuation of the ‘stretched’ price action and divergent internals (caution signals).

Here’s a few recent posts on Market Internals:

“Market Internals Turn Unstable to Start October”

“Updating TICK Volatility Chart for October”

“Why You MUST Consider Volatility When Trading with the TICK”

“Research in Behavioral Changes in the TICK Over the Last 10 Years

I’ll be discussing breakout, retracement, and reversal trading tactics (including a few tips about Market Internals) live at the Las Vegas Traders Expo on November 22 – join me and your fellow traders at the free expo!

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 along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

4 Comments

4 Responses to “A Quick Warning from October 15 Divergent Market Internals”

  1. jeff Says:

    nice post. i specifically like the how to interpret this – that is “This doesn’t mean the market is required to reverse lower, but it does mean that odds have deteriorated to expect additional non-stop upside action without a ‘break’ or pause (retracement) after three days of strong money flow or upward price impulse.”

  2. Corey Rosenbloom, CMT Says:

    Indeed!

    The market continues to be focused on headlines from Washington DC so in the rare event a compromise/solution is reached, one would expect a strong upside news-fueled rally no matter what divergences or other indicators suggest.
    Thank you for your comment.

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