Check on Market Internals Breadth and VOLD on the Push to Key Level

Dec 6, 2010: 12:45 PM CST

What are current market internals – specifically Breadth and Volume Difference (of Breadth) – revealing about the current strength of the recent price push into overhead resistance?

Let’s take a look and devise an “IF/THEN” scenario to plan what to do depending on what happens here at the key overhead levels.

Traders often look “under the hood” of the market to a set of indicators known as “Market Internals” to reveal clues that price alone might not be showing.

Generally, during a strong rally, we want to see market internals (namely stocks participating in the rally, stocks making new highs, volume, etc) also expanding higher with price.

If so, then all is well and there is no danger or caution.

If market internals decline as a rally continues, it’s a sign of caution – not panic – that calls our attention closer to price to be on guard for any sudden reversal.

These are called “Market Internal Divergences” and are often good clues that a rally may not be as strong as it looks on the surface.

As a caveat, I’ve seen instances where internals deteriorated strongly but price continued higher and higher – I’m sure you’ve seen that too!

So what’s the current state?  It’s divergent.

On the surface, price (the S&P 500) is pushing up into the key 1,230 level (which marks two tests of resistance in 2010 along with the 61.8% big Fibonacci Retracement at 1,228) which is important to know.

And as price pushed strongly up into that level last week, internals were strongest at the start and weakened every single day after the initial December 1st surge.  That’s absolutely natural – and it’s what’s supposed to happen – but it does call our attention to the current state of the market and warns us to use a bit more caution.

In other words, now is not the time to rush in long UNLESS buyers can break the market above the 1,230 level, and if so, we want to see a corresponding INCREASE in the picture of Market Internals.

For reference, what I’m showing is the classic BREADTH, of the number of stocks that are positive (up) on the session (at the time the data point appears) minus those that are negative (down) on the session.  It measures broad participation of stocks and how they form the index.

Under Breadth ($ADD) is VOLD, which is the VOLUME DIFFERENCE of breadth – namely volume of advancing stocks minus volume of declining stocks.

Ok so both Breadth and VOLD are declining.  Price also broke a short-term trendline earlier today.  That’s interesting – a caution signal, but again not a panic one.

I would suggest watching what happens short-term at the horizontal line at 1,217 for clues – price can break a rising/angled trendline but NOT reverse trend, instead bouncing off a new floor of support.

Whatever any indicator is showing, the most important thing to watch is the 1,230 level.  It’s a MAJOR break-point between buyers and sellers, and we could see a big break if buyers keep the market above that level and short-sellers rush to cover (short-squeeze) in a Popped Stops move.

A quick note on Popped Stops – I’ll be participating in an Online Chat this Wednesday, December 8th with the MoneyShow.com’s eShow Chat Session at 12:30 EST / 11:30 CST with the topic being “Popped Stops – How to Profit when Good Trades Go Bad.”   It will be a brief, interactive 30-min session.

So while internals are saying “caution, be safe, be on guard, look closer,” it’s probably best to see this as a caution signal unless there’s a firm move DOWN under the new short-term support or a big move UP above the long-term major resistance at 1,230.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

2 Comments

2 Responses to “Check on Market Internals Breadth and VOLD on the Push to Key Level”

  1. Terlyn12001 Says:

    Ending diagonal on SPY?

  2. Corey Rosenbloom, CMT Says:

    It's a possibility – the 60-min chart is looking quite interesting with more divergences.

    But a breakout above 1,230 eliminates/dis-confirms all negative/bearish patterns or indicators as bears are forced painfully out of their short-sale positions via Popped Stops on a breakout/short-squeeze should the market resolve UP from here.