July 8 Check on SPX Declining Market Internals

Jul 8, 2010: 1:37 PM CST

While market internals recently turned positive to suggest a rally higher, now that the rally higher has materialized, these same market internals are turning lower in a negative divergence, suggesting a different story.

Let’s take a look at the current chart of the S&P 500 and market internals:

The chart shows the S&P 500 index 15-min chart with the Breadth, TICK, and Volume Difference beneath the price chart.

As is the usual case, we look at recent extremes in price and then compare market internal readings to these highs, asking whether or not internals are confirming or disconfirming the recent price swing.

In this case, they are not, as price rallied to 1,070, but all three internals went lower on the morning rally.

That’s a classic non-confirmation and negative divergence which warns of caution and a possible downside move ahead, if the signal from internals holds true.

The official trigger would be a break back under the 1,050 level, though a break under 1,060 would be the early reversal signal for aggressive traders.

When price breaks trendlines after forming negative internal divergences, that sets up an opportunity to trade in favor of a reversal in price.  Notice that we’re already under the rising trendline drawn from yesterday – price broke that just as I captured the image for this chart.

Keep watching internals as the market challenges the current levels.

[AFTERNOON UPDATE]

The market held the 1,060 level nicely and sparked a rally, complete with new intraday TICK highs – underscoring the importance of monitoring internals all day for changes in strength or weakness]

Corey Rosenbloom, CMT
Afraid to Trade.com

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

7 Comments

7 Responses to “July 8 Check on SPX Declining Market Internals”

  1. Onlooker from Troy Says:

    Yes, but now as we're approaching the 1070 high of the day we're seeing weaker internals and RSI giving us a nice possible neg div that may lead to a sizable drop, if not a resumption of the downward trend.

    That said, I don't want to take that short trade here as I expect that this rally isn't done yet, in time or price. I think sentiment is much too bearish still and needs to be neutralized before we go down to new lows.

    But it's tempting given the very bearish nature of this market lately that has made the bearish bet the one to make, until proven otherwise, of course. But I can't help but think we may get yet another squeeze at 1070 so I'll just stand aside here.

  2. Corey Rosenbloom, CMT Says:

    Good observation – with sentiment negative and bears shorting, we're more likely to get upside squeezes on any sudden move up in price, as we're seeing today.

  3. Onlooker from Troy Says:

    And now we're sitting right at 1070 at the close. We could go either way at the open tomorrow, and in a hurry. I don't want to be either long or short overnight into that situation.

    Interesting set up.

  4. Onlooker from Troy Says:

    And 1070 is also right at the 50% retrace level for the drop from 1131. If the bear's going to wake up again here and roll right over the oversold levels and sentiment extremes it could very well do it right here. But I don't really expect it yet, as I said before.

  5. ibiza2000 Says:

    Corey, I really like your internals updates and they usually confirm things that I've been seeing because I'm watching the same stuff.

    But it's uncanny how internal divergences never seem to produce the expected result when you make a post about it. I mean, today is another example. You mention the divergences…. and we close on the highs. I can't count how many times this has happened, but lately it seems to be happening every time!

    I don't know what to make of it. Probably just coincidence, but kind of funny in a way. I'm not into conspiracy theories so I'm not going to suggest that Goldman is manipulating the market to run the stops of people who enter trades off your posts. Or are they……..? LOL

  6. Corey Rosenbloom, CMT Says:

    Haha – what I like about market internals is that they are cold facts – either internals support recent moves or they don't, and if not, it creates a cautious posture.

    However, as mentioned, the signal is not given unless price breaks trendlines or support areas – in this case 1,060 at a minimum. Divergences are like a cloudy day, while rain is like the trendline break. You can have clouds without having rain.

    What I've found is that signals from internals often lead turns a few days in advance, but even then it's critical to monitor whether internals strengthen after a divergence. Markets are driven by supply/demand, not internals… but from where that demand comes from, that is the question! Most likely, after an initial buying surge, the remaining demand comes from “popped stops” of the short-sellers.

  7. Corey Rosenbloom, CMT Says:

    In addition, all three market internals on this morning's (July 9) high are weaker than they were when I posted this update yesterday.

    While the market may rally further on deteriorating internals, the longer it does so, the more severe the 'snap-back' drop when the market falls. Reference the May 12 and June 21 peaks. Just like a rubber band.