How the Three Key Market Internals Preceded Sharp Rally Feb 2

Feb 2, 2010: 3:50 PM CST

I wanted to share an educational chart on how the Three Key Market Internals formed a predictable pattern that helped forecast the odds of a sharp rally ahead, which we’re seeing materialize today.

Let’s take a look not just at that, but the current chart of Market Internals and some key Fibonacci overhead resistance targets to watch.

This chart shows the expected (and logical) resolution to a lengthy positive divergence situation in key market internals, including the

Breadth ($ADD),
NYSE TICK ($TICK),
NYSE Up-Down Volume Difference ($VOLD).

When you see this situation, it hints to you that a reversal (or retracement) swing is likely approaching, and can be a violent reversal if the divergence condition has been in place for a few days.

All three market internal indexes made their lows on January 22nd, hinting that odds favored lower prices yet to come (and they certainly did).

From there, though we saw new price lows, we did not see new market internals lows in any index… though we did see a spike down (again, not forming a new low) on January 29th.

Notice that price made a key new swing low while internals did not – that’s a classic “hidden” sign of strength which signals that odds favor a reversal ahead.

For now, we are seeing the resolution of the positive build in internals with a sharp and powerful retracement rally (also called a “Snap-Back”).

I’ve drawn a Fibonacci Grid from the highs to show possible inflection (resistance) points to watch going forward, which include $110.35, $111.27, and $112.18.

To further the educational component of this lesson, I’m showing a chart I published in last night’s subscriber letter/Idealized Trades (click link to join) reports that warned of the likely “reversal/retracement” in price, particularly if we broke above the EMAs at the $109.00 level … which happened right off the open.

Feb 1 SPY Chart of Market Internals:

I included a description of what to expect going forward, but the main idea was that if price broke the $109.00 level – which it appeared to be doing as of yesterday’s close – then odds favored a rally higher due to the hidden ’strength’ showing from market internals (divergences at the lows).

The Idealized Trades reports are both educational (discussing and explaining professional trading tips, strategies, and concepts) each day along with defining what to expect for the next trading session based on the current structure and opportunities setting up as of the close.

It’s very important to monitor Market Internals, as this educational example shows. They can give you ‘hidden’ clues as to possible reversals in both directions by monitoring price with divergences in internals as shown here.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Comments

GreenAB

when i look at the chart the exact same divergence has already been in place on jan. 26th.

i don´t want to offend you and i appreciate your service - but why always commenting on divergences that worked (in hindsight) but no examples of false signals?

Corey Rosenbloom, CMT

GreenAB,

The focus of this blog is an educational service - not a "call out real time signals" service. My thought process is that if I teach these concepts, you will learn them and be able to interpret them on your own and thus be the better for it. Plus, sometimes divergences - particularly intraday - occur to quickly to call out, or I am actively trading them and will not pause my trade to comment on them. Times where I have called out real time divergences have resolved often too quickly for most people to act so that's a problem too.

My take is that it's more beneficial to all involved to show the example, comment on it, and show the resolution.

"Teach a man to fish and he will eat for a lifetime; give a man a fish... he'll eat for a day."

Or more comically, "show a man an intraday divergence and he'll ... possibly eat for a few hours if he saw the post in time!"

There's no indicator that's perfect in any sense of the word.

I do real-time/end-of-day analysis/signals as in calling out structure, opportunities, etc to my subscribers which combines the education into action each evening.