Check on Intraday Market Internals Shows Make or Break for SP500

Feb 24, 2011: 1:41 PM CST

In my prior post about key inflection points on the three major US Stock Market Indexes, we saw quick, easy reference levels to watch, including 1,300 for the S&P 500.

Let’s now take that a step further and check-up on intraday market internals which – as of this moment – are painting a bullish picture at this key “Make or Break” chart level.

A failure for bulls to capitalize on this support and bullish signal from internals could spell disaster for them.

Let’s see the current signal from the Triple-Internal Chart:

The Three Market Internals I watch are Breadth (difference in Advancing minus declining stocks), TICK (extremes), and VOLD (Volume Difference of Breadth).

Right now ALL THREE are cleanly and clearly BULLISH in terms of showing a non-confirmation via positive divergences with price.

What’s happening on the higher frame is that price is trying to bounce off the key 1,300 Bull/Bear Inflection point – and for the moment, internals tip the probabilities right now to the Bulls.

That would shift dramatically if bulls FAIL to hold this level.

For reference, Breadth was running in the -2,400 region on Tuesday and now turned positive this morning but is near the -200 level.

TICK extremes have also shown positive divergences.

VOLD – Volume Difference – is also off its extreme readings from Tuesday and is flirting with the -200,000 level after being under 600,000 for the latter half of Tuesday.

One of my favorite sayings in trading is that:

If something SHOULD happen but does not, then it often leads to a more powerful move in the opposite direction.

Based on the objective, non-biased signal from the chart – namely positive internal divergences at the critical 1,300 support level – we would imagine it quite possible bulls would seize this opportunity and play long.

If they try to play long here but sellers overpower them in the market, then it could lead to a capitulation of those short-term bulls who just got long here, resulting in a ‘long-liquidation’ flush as sellers stepped up their aggression level on a breakdown under 1,300.

Again, this is the power of inflection points – we look to indicators/signals to help us assess the probabilities of support holding or breaking, but we must be prepared to act in either direction – especially if the actual move is the ‘unexpected’ one.

Anyway, let’s pull the camera back to see what internals said before this week’s “crash”:

What we’re seeing now is S&P 500 SPECIFIC Market Internals – namely Breadth.

The top Green Chart is the S&P 500 Advancing Stocks while the middle Red Chart is the S&P 500 Declining Stocks.

This teases out the data and allows you to step inside breadth – to see if the difference is coming from MORE stocks advancing or MORE stocks declining – or whatever the combo is.

The final lower Red/Green Chart is your typical Breadth – the difference between advancing and declining stocks.

Again I’ll let the chart speak for itself, but we see CLEARLY that as we pushed into the 1,340 level Friday, FEWER stocks were advancing on the session and MORE stocks were declining on the session.

That resulted in a deterioration in Breadth and the end-result was a market collapse Tuesday – exacerbated by the weekend Libya/Oil news.

And right now, as we toy with 1,300’s critical short-term inflection support point, we’re seeing FEWER Declining Stocks and MORE Advancing Stocks – resulting in a positive divergence in breadth (that I showed above).

So here we are – it’s Make or Break for the Bulls.  Step it up here and support this market, or if no support at 1,300, the next target to play for the next support level will be near 1,280.

Under 1,280 opens up the possibility for a further crash scenario – but don’t go rushing out thinking a crash is inevitible – it’s not and bulls have a chance here and at 1,280 to prevent that potential game-changer.

So for now – on a short-term basis – the 1,300 level is a critical support level bulls MUST defend, and the signals from Market Internals hint that they may very well do just that.

If not… be prepared.

Corey Rosenbloom, CMT
Afraid to

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