I wanted to highlight a key structural point that many traders might have missed when evaluating this morning’s gap in the stock market.  Let’s learn a quick lesson on market internals as sources of confirmation.

What we’re looking at is the SPY (S&P 500 ETF) on a 15-minute chart with the NYSE TICK in the middle panel and the “Breadth” or net difference between the Advancers and Decliners on the lower panel.  These help serve as market internals to allow us to look ‘under the hood’ to see if the internals are ‘confirming’ the new price highs.

In this case, they clearly were not, but many traders failed to see this when they took a look at price by itself.

The highest TICK high – almost 1,500 – formed mid-Monday (May 18th) which preceded the price highs yet to come.  Once the market gapped up on Wednesday, we had a maximum TICK reading of 1,030, which was a bit lower than the prior high when the SPY traded at $90.80.  We would expect new price highs to be ‘confirmed’ by new TICK highs to continue to be bullish.

We see the same picture in the “Breadth.”  At the peak at the close Monday, we had a differential of 2,730 more stocks trading higher on the day, though when we opened on Wednesday, the Breadth managed to climb just above 2,500 on the peak, which was up from the 2,300 we saw at the open – another ‘non-confirmation.’

Ultimately, the day formed a “Failed Trend Day Up” which actually led to a type of Trend Day in the opposite direction – down.  Looking back, it formed a beautiful bear flag on the 15-minute frame.

As the market opens particularly to a new high (or low), look ‘inside’ the market to the internals to see if these are also confirming the market strength… or whispering an opposite story that is only heard by those who know how to listen.

Corey Rosenbloom, CMT
Afraid to Trade.com

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