July 12 Market Internals Reveal Dangerous Divergences

Jul 12, 2010: 12:33 PM CST

A standard mid-day check of market internals shows us a blatant negative divergence – this time with market internals turning negative as price clawed its way to a new swing high this morning.

It’s a situation you certainly need to watch closely.  Let’s take two perspectives of the SP500 Market Internals.

First, the standard view:

This is the classic chart of market internals I frequently show in the updates.

For recent signals and outcomes of Market Internal divergences forecasting reversals in price, see my most recent post:

“Market Internals DO Matter!  A Look at Three Reversals in June.”

A quick view of the current structure reveals severe cracks in the price structure, when comparing the recent push to 1,080 to the three key market internals of intraday Breadth, TICK, and Volume Difference.

Look closely – Breadth remained negative (more stocks trading down on the session than those trading up) all day except for a quick peak of 358 at 9:00am, which was quickly erased to negative.

What’s more important is the crystal clear negative Breadth divergence from Friday’s close to this morning’s open – with the S&P 500 index crawling to a new high.

TICK and VOLD also show similar structure, with VOLD turning negative at 9:10am.  VOLD compares volume flowing into advancing stocks minus volume flowing into declining stocks, and is thus highly correlated with Breadth (Advance – Decline).

Remember the standard caveats that always apply:

Divergences never GUARANTEE reversals
Wait for price to break trendlines before entering reversal positions
Price can continue to rally further than we expect despite declining internals, but the reversals are harsh
“Price is King” and ultimately is the deciding factor

Divergences are conditions that reveal the strength or weakness of a price move in action – and the stronger the divergence, the stronger the expected reversal or ‘correction’ of the divergence.

Reference my prior post that shows two possible overhead confluence price targets at 1,090 and 1,110 – which is the bigger picture than the intraday charts, if the rally continues despite the divergences.

Here is a simplified line-chart look at the current state of internals:

The chart above is just a simplified line chart connecting 15-min closes of Breadth and VOLD over the last few sessions.  The divergence is more evident in Breadth and VOLD.

Investors will be watching today’s Alcoa (AA) earnings announcement to kick-off earnings season, so a much better than expected announcement there could spark a continuation of the rally and a strengthening of market internals.

Remember – we need to see internals strengthen to confirm the price rally, or we need to see price fall to ‘work-off’ or correct the divergence.

Keep watching the price and internals structure to see which of those two situations resolve these dangerous divergences.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

15 Comments

15 Responses to “July 12 Market Internals Reveal Dangerous Divergences”

  1. Ericmelchers Says:

    can i ask u a question Corey?

  2. Corey Rosenbloom, CMT Says:

    Sure –

  3. Ericmelchers Says:

    I read all your posts by the way. Thank you very much for your comments and analysis, its very helpfull. Since I sort of new to trading, I was wondering if you could recommend a free intraday 2-3 min candlesticks charts site that I can refer to. I have been paying for finwiz elite and although it was good, I'm inquiring to see if any free ones are available.

    Thank you again.

  4. Michelle B Says:

    Using your own metaphor from an earlier post, lots of clouds and but no rain yet.

  5. Corey Rosenbloom, CMT Says:

    Good question, Eric!

    I'll ask other readers to add their suggestions to the comments.

    I'm not really a scanner outside of TradeStation's RadarScreen, so I'm probably not the one to ask, and I very much enjoy FinViz's and StockCharts.com's scanning capabilities, but both are paid sites for the premium info.

    I don't think it has a scanner, but Tom Bulkowski's Pattern Site is great for knowing what the candles are and what to expect:

    http://thepatternsite.com/

    There's always http://www.barchart.com but again I don't do much scanning with candles.

    Other readers feel free to contribute.

  6. Corey Rosenbloom, CMT Says:

    Excactly, Michelle!

    The darker the clouds, the worse the storm.

    Scattered clouds? No big deal. Simple retracement.

    Black, thick, thundering clouds? Um – take cover.

    Last time that happened was the 50 point SP500 drop in 8 days in a row after the obnoxious divergences in late June.

  7. Michelle B Says:

    Per volume profile graded charts, it is clear there is huge resistance at the 1080ish level for the spx futures. So not only clouds, and possible rains, but also a very hard brick wall.

  8. Corey Rosenbloom, CMT Says:

    Right – goes along with the confluence daily chart resistance prices at 1,090 and 1,110.

    Not saying we can't go over those – expect anything – but the odds are very, very much against it as they stand right now mid-day Monday.

  9. Michelle B Says:

    meant volume profile gradient chart.

  10. Ericmelchers Says:

    Thank you very much. I'll continue my research and post again if I find one worth mentionning.

    Cheers.

  11. tradernina Says:

    I dont know about candlestick pattern scanning, but freestockcharts.com gives free intraday charts and is real time

  12. MadScientist Says:

    Corey – you are the KING of positive and negative divergence.

    Thanks for spotting them, each and every time!

  13. acrowder Says:

    Corey,

    Wonderful article. I just posted it in my comments section for readers. This might help some of you as well, at least over the short-term.

    http://www.crowderoptions.com/the-week-ahead-up

    Kindest.

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