Here again we face a critical test of overhead resistance on declining momentum and market internals.  That doesn’t guarantee a reversal, but it sure suggests one is likely… and if it’s going to happen, it will happen right here.

Let’s see why:

In previous posts, I’ve advocated watching the daily EMAs for reference levels.

Here we sit currently at the 20 day EMA at 1,172 (actually coming down off of it at the time of this post), so what happens here will be critical to the short-term trend of the market.

As we test this key level, we have a distinct (and obvious) negative market internal divergence along with negative momentum divergences (not shown).

Pay particular attention to the internal divergences.  When comparing yesterday’s swing high with today’s swing high at the 1,172 level, ALL three key internals are registering lower values (highlighted).

Breadth is down 1,400 from the high; TICK high extremes are down as well, and VOLD (Volume Difference of Advancers and Decliners) just turned NEGATIVE on the session after we just hit a new swing high.  Wow.

Odds are strong for a downward retracement forming… but always keep in mind the caveat that ’strong’ does not mean ‘guaranteed,’ so you’ll need to watch your stops above 1,172.

In the event that buyers/bulls thwart these bearish non-confirmations and push the index to a new high, it’s likely we’ll see another round of “Popped Stops” as short-term intraday bears (and swing traders) cover (buy to cover/take their stop-losses).

Watch the 1,172 level very closely and let’s see how these negative divergences play out as we test the underside of the 20 day EMA.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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