Current Market Internals and Recent Breakout in NASDAQ and Dow Jones

Sep 27, 2010: 9:36 AM CST

I have to say the current stock market breakout has been one of the weaker technical (chart) breakouts in terms of volume, momentum, and internals.

Let’s take a look at the current picture of Daily Chart market internals on the Dow Jones and NASDAQ Indexes year-to-date.

Let’s start first with the Dow-30 Index:

Let’s break it down by indicator.

First, we have the NYSE McClellan Oscillator (a smoothed measure of Advancers minus Decliners, also known as “Breadth”) and then we have the actual “Breadth” chart underneath.

Because the daily AD-Line (Advancers minus Decliners) is volatile (it’s light gray), I smoothed out the raw data with a four-day simple moving average which we’ll use as our indicator – it’s dark blue.

Ok so what do they say?

The Dow broke above the key resistance at 10,700, held above it, then ‘re-confirmed’ the breakout on Friday.  During the breakout, Volume, Momentum, and Breadth all declined.

You can see volume if you look closely above, but the glaring picture is clear when seeing the negative divergence – shown with red arrows – in both the McClellan Oscillator and Breadth.

First, the McClellan Oscillator registered a LOWER high in the indicator currently than it did at its chart peak in July.  Notice price is higher than its respective peak in July – that’s a longer-term (external) divergence.

We also have an immediate negative divergence – or an internal divergence – as Friday’s oscillator high was not as high as that not just on Monday’s breakout, but is not as high as the peak in early September when the Dow pushed to 10,500.  Strange.

The smoothed average of breadth shows the same, only the recent peak was earlier on the break above 10,300.  Really strange.

The picture is the same on the NASDAQ using NASDAQ-specific internals:

The picture is roughly identical – down to the internal and external divergences.

Notice that Breadth (blue) also is not making a higher indicator high than the peak reached in July or the chart indicator peak in June.  Very strange.

So we’re left with the conclusion that market internals do NOT support this recent breakout.

While that’s a fact, it does not logically follow that price is required to fall down just because internals are not supporting this rally.

It’s certainly a caution signal for bulls – but the recent ‘rally at any cost’ activity is also a warning for bears.

Unless you’re an intraday trader who can trade both directions without bias, it’s probably best to wait for a corresponding breakdown signal in price before trying to short this ‘breakout’ market.

And if you’re a swing trader, this is not the typical breakout pattern situation that would compel you to jump off the sidelines aggressively and go long – if you’re not already in after the immediate break.

In other words, we may have had a price break, but if we look under the hood at the strength of the breakout, it doesn’t look like a strong one.

Dow Price Resistance is nominally 10,900, while NASDAQ resistance is 2,425 (and S&P at 1,170) – all of which come from the price swing highs in May.

Watch the market extremely close and do not bias yourself too greatly in either direction – as in, the market MUST continue its rally because it broke out… or the market MUST decline because there are divergences.

Take a moment to read my prior updates:

Measuring Current S&P 500 Market Internals in a Strong Rally

SPX Breakout – Is this Really It?  Tips on Trading Breakouts

and

SPX Levels to Watch and Realities You Must Know

Corey Rosenbloom, CMT
Afraid to Trade.com

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

8 Comments

8 Responses to “Current Market Internals and Recent Breakout in NASDAQ and Dow Jones”

  1. Charuharish Says:

    Short is not working for me, so either I am long or out.

  2. Pascal123x Says:

    I think, you mean S&P at 1170 instead of 1070.
    Pascal (from PARIS – France)

  3. Corey Rosenbloom, CMT Says:

    Thank you, Pascal! You're right – I was trying to type too fast there.

    Glad to have you as a reader from Paris!

  4. Corey Rosenbloom, CMT Says:

    The current situation may be a reminder that “Price is King” and everything else is secondary. Helpful, but secondary.

  5. Joshua Says:

    Hi Cory,
    I don't see you use directional movement indicator too much. Bloomberg a while back had an article that DMI was one of the few indicators that would have made you money on 2008. What do you think?

  6. Matthew Driskill Says:

    hi there,

    in terms of conceptualizing divergences like this, does the idea of short covering versus proper long buying add any intellectual conviction here?

    price action may indicate a break out as shorts knee-jerk cover (understandable), but the lack of volume, conviction, breadth, etc. seems to indicate little proper buying enthusiasm.

    dig your work. maybe you intentionally try to avoid these sort of suppositions and keep the technical analysis clean, but i thought i'd at least mention it, b/c it does fit the “technical narrative.”

    matt d

  7. Don-Da-Mon Says:

    Here we are at 1150 on the S&P which was the target to match the Jan 19th left shoulder of 1050.45. We are still testing the flash crash and approaching Oct which is EOY for many fund managers. The driving factor is quaterly and yearly fund results right now.

    Left shoulder was end of first Quarter 1050

    Head was end of second Quarter 1219

    Right shoulder started the end of third Quarter shortly after the flash crash 1010

    And it looks like the right shoulder has peaked now at the end of 4th quarter and EOY. So up til and of October will be interesting to see if the shoulder completes before then or later.

    So my next target is 1010 to complete the right shoulder but not sure when.

    Corey, I haven't seen a post which mentioned this head and shoulders. Is it viable? Do the indicators match what one would expect in a H&S?

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