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